Volatility smile: Difference between revisions
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A view that the probabilities of very large market movements - positive or negative - are greater than predicted by a simple random walk model of market prices. | A view that the probabilities of very large market movements - positive or negative - are greater than predicted by a simple random walk model of market prices. | ||
In other words, the view that market shows trending behaviour in relation to large market movements: 'Both panic and over-exuberance are contagious'. | In other words, the view that market shows trending behaviour in relation to large market movements: 'Both panic and over-exuberance are contagious'. | ||
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This view is also a potential explanation for leptokurtic frequency distributions. | This view is also a potential explanation for leptokurtic frequency distributions. | ||
(Which have longer 'tails' of extreme values than the simpler Normal frequency distributions often used for modelling and calculation purposes.) | (Which have longer 'tails' of extreme values than the simpler Normal frequency distributions often used for modelling and calculation purposes.) | ||
== See also == | == See also == | ||
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* [[Random walk]] | * [[Random walk]] | ||
* [[Volatility]] | * [[Volatility]] | ||
[[Category:Financial_risk_management]] | |||
Latest revision as of 12:13, 23 November 2014
A view that the probabilities of very large market movements - positive or negative - are greater than predicted by a simple random walk model of market prices.
In other words, the view that market shows trending behaviour in relation to large market movements: 'Both panic and over-exuberance are contagious'.
This view is reflected in deeply out-of-the money options having greater implied volatilities (calculated from their greater traded values) than at-the-money options.
This view is also a potential explanation for leptokurtic frequency distributions. (Which have longer 'tails' of extreme values than the simpler Normal frequency distributions often used for modelling and calculation purposes.)
