Examining the volatility skew in the South African equity market using risk-neutral historical distributions

Abstract

Extracted from text ... Examining the volatility skew in the South African equity market using risk-neutral historical distributions Investment Analysts Journal - No. 64 2006 15 Examining the volatility skew in the South African equity market using risk-neutral historical distributions 1. INTRODUCTION* 1.1 Volatility skews and the notion of fairness The volatility skew is a function relating the implied volatility of an option to its strike price. For most equities and their associated indices, a plot of this function yields a decreasing curve, which indicates that, as the strike price of an equity option increases, so its implied volatility tends to decrease. Implied ..