Documente Academic
Documente Profesional
Documente Cultură
January 2004
Nicolas Blanc
+33 (1) 40 14 76 75
nicolas.blanc@bnpparibas.com
Assessing The Skew With Historical Returns
Page 2
Executive Summary
Skew definition
Historical Skew
Page 3
The Black & Scholes model
Historical vol
Historical Returns Fair option price
B&S Model
Page 4
The Skew Is A Correction To B&S
Historical volatility ?
Page 5
Typical Skew Pattern
35,00
30,00
25,00
20,00
15,00
10,00
3000 3500 4000 4500 5000 5500 6000 6500 7000 7500
Page 6
Pricing An Equity Derivative
General case
General Pricing
“Skewed” model Price any (exotic)
Option Prices + Calibration derivative
procedure
1
Short 2/dK Call Strike K
∂ 2C (K ,T )
Long 1/dK Call Strike K + dK ≈ dK
∂K 2
Long 1/dK Call Strike K - dK
K-dK K K+dK
∂ 2C (K ,T )
∞
→ ∫ F (K )
dK →0
dK
−∞
∂K 2
K1 K2 Kn
Page 8
Risk Neutral Density
1,2
∂ 2C (K ,T )
ϕT (K ) = e
rT
∂K 2
1
Option with payoff F(S) at T,
0,8
Arbitrage Price
= e -rT ∫ F(s )ϕ (s )ds
0,6 = e -rT EQ [F(S )]
where Q is given by ϕ
0,4
0,2
0
0 10 20 30 40 50 60 70
Underlying Stock
Page 9
Interpretation: Risk Neutral Density
0,0018
0,0016
Normal density function
0,0014
0,0012
0,001
0,0008
0,0006
Skew-implied
density function 0,0004
0,0002
0
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%
Log Returns
Page 10
Next Step: Skew-Compatible Asset Process
dS
= (r − d )t + σ (S, t )dWt
S
Case of local volatility models ∂C ∂C
2 + (r − d )K + dC
σ (S, t ) = ∂T ∂K
2 ∂ C
2
Beyond: K
∂K 2
Jump models
Stochastic volatility models
Page 11
Risk Neutral Historical Density
Page 12
Risk Neutral Historical Density
2800
T
2600
2400
2200
2000
1800
01/03 07/03
Kernel smoothing
T
x − Rt
(R1,L, RT ) → f (x ) = 1 ∑ K
υ.T t =1 υ
8
Discrete density
4
f(x): Continuous density
Log Variation
0
-60% -40% -20% 0% 20% 40% 60%
Page 14
Risk Neutralization
3500
3100
2700
2300
1500
12/03/03 12/06/03 12/09/03 12/12/03
Page 15
Further Restrictions
Page 16
Risk Neutralization
RNHD
3
Historical
Distribution
2
Log Variation
0
-40% -30% -20% -10% 0% 10% 20% 30% 40%
Forward
Page 17
RNHD
4,0
3,5
3,0
Density on S is the
2,5
historical density of
Log(S/S0)
2,0
1,5
1,0
0,5
S0 (2440)
S
Index Level
0,0
1 500 1 700 1 900 2 100 2 300 2 500 2 700 2 900 3 100 3 300 3 500
4,0 2 000,0
RNHD 1 800,0
3,5
1 600,0
3,0
Call payoff 1 400,0
2,5
1 200,0
2,0 1 000,0
800,0
1,5
Call 600,0
1,0
Value 400,0
0,5 (x erT) 200,0
Index Level
0,0 0,0
1 500 1 700 1 900 2 100 2 300 2 500 2 700 2 900 3 100 3 300 3 500
Page 19
RNHD: Results
30 September 2003
40%
35%
30%
25%
20%
€ Stoxx level
15%
1700 1900 2100 2300 2500 2700 2900 3100
RNHD Skew Implied skew Historical volatility
Page 20
RNHD: Results
56% 8%
36% 4%
16% 0%
RNHD Historical
6% -2% RNHD Implied
Implied
-4% -4%
sept-01 mars-02 sept-02 mars-03 sept-03 sept-01 mars-02 sept-02 mars-03 sept-03
66% 56%
Moneyness = 80% Moneyness = 120%
56%
46%
St Err = 9.2%
46%
36%
-4% -4%
sept-01 mars-02 sept-02 mars-03 sept-03 sept-01 mars-02 sept-02 mars-03 sept-03
Page 21
Conclusion
Possible Reasons
Page 22
Historical Skew
Page 23
Historical Skew
1
2 ∆St
2
P&L variation γ (St , K ,σ ,T − t )St − σ ∆t
2
2 St
accumulated P & L
T
∆t
−1
e r (T −i∆t ) ∆S
2
P & L(σ , h) = ∑ γ (Sh + i∆t , K ,σ ,T − i∆t )Sh + i∆t h + i∆t
2
− σ ∆t
2
i =0 2 Sh + i∆t
Page 24
Historical Skew
2400
2200
2000
1800
The final return St+T / St do not matter. It’s the sequence of (∆St/St)2 that
drives the P&L.
Furthermore, the (∆St/St)2 will impact the P&L in proportion of the gamma of
the option of strike K at the point St
Page 25
Historical Skew
1 H
P & L(σ ) = ∑ P & L(σ , h )
H h =1
Page 26
Solving for the optimal σ
1 H ∆S 2
0 = ∑ γ (Sh , K ,σ ,T )Sh
2 h
− σ ∆t
2
h =1 2 Sh
Equivalent expression:
Page 27
Links with Black & Scholes
Thus we have:
2
1 2 ∆S
P&L = γS − σ ∆t
2
2 S
Page 28
Results
As of 8 December 2003
35%
30%
25%
20%
15%
€ Stoxx level
10%
1800 2000 2200 2400 2600 2800 3000 3200 3400
Historical skew Implied skew Historical volatility
Page 29
Results
70% 8%
9m Historical skew
9m Historical Moneyness = 100%
Implied Skew
60% 9m Historical skew
6%
Implied StError = 5.3%
Average=4.1%
50%
4%
40%
2%
30%
Average=3.3%
0%
20%
août-01 févr-02 août-02 févr-03 août-03 févr-04
StError = 7%
10% -2%
août-01 févr-02 août-02 févr-03 août-03 févr-04
70% 70%
50% 50%
StError = 5.1%
40% 40%
StError = 9.2%
30% 30%
20% 20%
StError = 9.3%
10% 10%
août-01 févr-02 août-02 févr-03 août-03 févr-04 août-01 févr-02 août-02 févr-03 août-03 févr-04
Page 30
Results
16% RNHD
Historical Vol
14%
Historical Skew
12%
10%
8%
6%
4%
2%
0%
80% 90% 100% 110% 120%
Page 31
Application to other derivatives
Page 32
Conclusion
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