Ad Hoc Black and Scholes Procedures with the Time-to-Maturity

Abstract

There are two ad hoc approaches to Black and Scholes model. The relative smile approach treats the implied volatility skew as a fixed function of moneyness, whereas the absolute smile approach treats it as a function of the strike price. Previous studies reveal that the absolute smile approach is superior to the relative smile approach as well as to other sophisticated models for pricing options. We find that the time-to-maturity factors improve the pricing and hedging performance of the ad hoc procedures and the superiority of the absolute smile approach still holds even after the time-to-maturity is considered. © 2018 World Scientific Publishing Co.