Template-Type:ReDIF-Paper 1.0  
Title:On Smile and Skewness
Author-Name: Platen, Eckhard 
Author-Name: Martin Schweizer
Classification-JEL:G10, G13
Keywords:option pricing, Black-Scholes formula, implied volatility, smile, skewness, stochastic volatility, feedback
	effects
Abstract:This paper proposes a new explanation for the smile and skewness effects in implied volatilities. Starting
	from a microeconomic equilibrium approach, we develop a diffusion model for stock prices explicitly incorporating the
	technical demand induced by hedging strategies. This leads to a stochastic volatility endogenously determined by
	agents' trading behaviour. Using numerical methods for stochastic differential equations, we quantitatively substantiate
	the idea that option price distortions can be induced by feedback effects from hedging strategies.
Length: pages
Creation-Date: 1994-12
Revision-Date: 
Handle: RePEc:bon:bonsfb:302