Option Implied Tail Index and Volatility Based on Heavy-tailed Distributions: Evidence from KOSPI 200 Index Options Market

This paper compares the option implied tail indexes and volatilities from two option pricing formulas based on heavy-tailed distributions: generalized extreme value (GEV) distribution and generalized logistic (GLO) distribution. Option pricing models based on heavy-tailed distributions with three pa...

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Bibliographic Details
Published in:Global economic review 2014, 43(3), , pp.269-284
Main Authors: Kim, Joocheol, Kim, Hyun-Oh
Format: Article
Language:English
Subjects:
Credit
Distribution
generalized extreme value distribution
generalized logistic distribution
Heavy tail
implied volatility
Indexes
Logistics
Market
Morals
Option pricing
Options markets
Price models
Pricing policies
Put & call options
Stochastic models
tail index
Volatility
경제학
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Summary:This paper compares the option implied tail indexes and volatilities from two option pricing formulas based on heavy-tailed distributions: generalized extreme value (GEV) distribution and generalized logistic (GLO) distribution. Option pricing models based on heavy-tailed distributions with three parameters overcome some well-known drawbacks of the Black-Scholes model when the realized underlying asset returns are not normally distributed. Both GEV-based and GLO-based option pricing formulas extract the implied volatilities successfully, indicating that they are compatible with the Black-Scholes formulas. However, GEV-based pricing model shows more unexpected patterns when extracting the implied tail indexes for put options than GLO-based pricing model including the credit crisis in 2008, implying that GEV-based pricing model is less capable of measuring the market sentiment during the extreme crisis events.
ISSN:1226-508X
1744-3873
DOI:10.1080/1226508X.2014.941377