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

Joocheol Kim, Hyun Oh Kim

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)269-284
Number of pages16
JournalGlobal Economic Review
Volume43
Issue number3
DOIs
Publication statusPublished - 2014 Jul 3

    Fingerprint

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics, Econometrics and Finance(all)
  • Political Science and International Relations

Cite this