Smoothing the volatility smile using the Corrado-Su model Online publication date: Fri, 19-Jun-2015
by Vinicius Mothé Maia; Antonio Carlos Figueiredo Pinto; Marcelo Cabus Klotzle
International Journal of Financial Markets and Derivatives (IJFMD), Vol. 4, No. 2, 2015
Abstract: The objective of the model suggested by Corrado and Su and improved by Brown and Robinson, is to adapt the Black and Scholes model to the distribution of the asset intended for pricing by introducing the returns' kurtosis and skewness. For this reason, it is expected that the model will be more apt for calculating implied volatility in order to reduce the volatility smile. The purpose of this paper is to show which window of observation generates the kurtosis and skewness that smoothes the volatility smile the most, using the Corrado-Su model. The companies chosen for the study were Petrobrás PN and Vale PNA because their stocks and options are the most liquid on the Brazilian market. The data analysis indicated a smoother volatility smile using short term observation windows rather than long term windows and a performance of earlier windows equivalent to those of the Black-Scholes model.
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