English, Article, Journal or magazine article edition: Approximating equity volatility. Ahmed Loulit

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Bookmark: http://trove.nla.gov.au/version/110991
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Approximating equity volatility.
Author
  • Ahmed Loulit
Physical Description
  • preprint
Notes
  • The volatility estimation is a crucial problem for pricing derivatives. The traditional implied volatility approach induces the undesired smile effect and is therefore inconsistent with the market reality. A second more realistic approach is due to Bensoussan, Crouhy and Galai (1995) who derive an extension of the Black-Scholes model where the stochastic volatility ? is endogenous and depends on the change in the firm’s financial leverage. These authors give an analytic approximation for ? when the firm is financed by external funds such as debts, under the assumptions that the risk-free rate and the volatility of the return on the firm’s asset are constant. In this work, we will generalize this result by allowing these parameters to be variable.
  • Black-Scholes model; derivative pricing; volatility.
  • RePEc:sol:wpaper:04-028
Language
  • English
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