The smile effect of options on share price index futures

Le, Tuan Anh. (2001). The smile effect of options on share price index futures Honours Thesis, School of Business, The University of Queensland.

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Author Le, Tuan Anh.
Thesis Title The smile effect of options on share price index futures
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2001
Thesis type Honours Thesis
Total pages 106
Language eng
Subjects 1503 Business and Management
Formatted abstract
The current study sets out to explore the smile effect in the context of the market for options on Share Price Index Futures Contract. The approach adopted is twofold. First, a strategy to trade on the smile is designed. This trading strategy is free from the valuation model and aims to test the effect of market imperfections on the curvature of the smile effect. Secondly, by way of Gram-Charlier approximation, the mis-specification issue is also addressed by allowing for skewness and excess kurtosis in the conditional distribution of asset returns. Due to the light trading volume in the SPI options market, this study reaches no definite conclusion regarding the effect of market imperfections on the option smile effect. On the other hand, it shows that skewness and kurtosis are highly relevant in option pricing. Particularly, incremental pricing improvement can be gained by restricting the skewness and kurtosis parameters to some certain ranges. Despite the pricing improvement, the skewness and kurtosis adjusted volatility smile is not flattened. This is likely due to the imperfectness of the Gram-Charlier model.

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Created: Thu, 18 Nov 2010, 15:37:38 EST by Muhammad Noman Ali on behalf of The University of Queensland Library