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https://doi.org/10.1080/1350486X.2017.1333015

has been cited by the following article:

• TITLE: On the Economic Premium Principle

  AUTHORS: Kazuhiro Takino

  KEYWORDS: Equilibrium Pricing, Pricing Kernel, Skewness

  JOURNAL NAME: Theoretical Economics Letters, Vol.8 No.3, February 14, 2018

  ABSTRACT: In this study, we propose an equilibrium pricing rule to capture a characteristic observed in the practical option market. The market has observed that the implied volatility derived from the Black-Scholes formula is monotonically decreasing with the strike price for the option, that is, it exhibits volatility skewness. Here, we construct a pricing method for the so-called economic premium principle. That is, we identify a pricing kernel from which we can evaluate the derivative from the market equilibrium. Our model demonstrates how to obtain a pricing kernel that satisfies the market equilibrium, and describes our equilibrium formula depicting the volatility skewness.