Analysis Of Implied Volatility Based On The Perspective Of The Model Of Supply Side

Volatility smile is always a special phenomenon in the options market.There is different volatility level with different strike price.This character violates the assumptions of BS model.What’s problem does the original model have?So many research have released these assumptions to fit the market price better,but there are few paper use regression to explain the relationship between risk-averse attitude and the slope of volatility smile.This paper has used equilibrium model to explain the relationship.We refer Hsieh and Jarrow(2017)to obtain the risk-averse coefficient from bid-ask spread.It tell us market maker can’t hedge perfectly inventory risk because market is not complete so the market maker wants to transfer the risk to the quoted price.Morever,we improve the dynamic-hedging model in Basak and Chabakauri(2012),we extended two assumption-drift rate and volatility is constant.Our model can characterize volatility skew which exist in the index options market.It correspond with the market.Especially,our model is based on supply side.Compared to demand side,our model can provide another perspective to analyze.We use TAIEX Options data to calibrate the parameters with long-term and short-term options.It explains the investor can afford higher risk and the volatility curve is more steeper in short-term options market.The paper fills up the condition which other literature didn’t explain by equilibrium model.Furthermore,we use weekly-options in our practical research,it raises accuracy in the result of calibration.