Asymmetric Option Price Distribution and Bid-Ask Quotes: Consequences for Implied Volatility Smiles

This is an interesting paper finding asymmetry in call and put values.

Abstract:

This study presents a model for estimating the asymmetry of option values with respect to option bid-ask spreads. The model does not require knowledge of the actual option value to evaluate the asymmetry. Using data from the Swedish equity options market, several interesting results emerge. First, there is evidence of asymmetry in call and put values, where values are closer to bid than to ask quotes. Second, in- and out-of-the-money calls and puts show a higher degree of asymmetry than at-the-money options. Third, taking asymmetry into account in the estimation of option-implied volatility, produces a less pronounced volatility smile.

Source: Norden, Lars L., Asymmetric Option Price Distribution and Bid-Ask Quotes: Consequences for Implied Volatility Smiles. Journal of Multinational Financial Management, Vol. 13, 2003. Available at SSRN: http://ssrn.com/abstract=430680

Keywords: Option bid ask spread, Asymmetry, Volatility smile

 

 

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