Multiple Choice
The Black-Scholes model is time-inconsistent in the way it is applied in practice.This is because the model assumes that volatility is constant,even though the trader changes it every day to obtain a new price.Using this definition of time-inconsistency,which of the following statements is valid?
A) The stochastic volatility model is time-consistent because the volatility of volatility is allowed to change in the model.
B) The GARCH model is time-consistent because traders who use GARCH do not change their inputs to the model frequently.
C) Implied binomial trees are time-consistent even though the implied volatility smile used to calibrate it changes over time.
D) The stochastic volatility model is time-inconsistent.
Correct Answer:
Verified
Correct Answer:
Verified
Q8: Stochastic volatility models commonly assume<br>A)There are jumps
Q9: GARCH models<br>A)Are discrete-time expressions of stochastic volatility
Q10: Which of the following assumptions made in
Q11: If the implied volatility surface is flat
Q12: A stock has a current price of
Q14: In the preceding question,the state price in
Q15: The Merton (1976)model<br>A)Modifies the Black-Scholes model by
Q16: The Heston (1993)model generalizes the Black-Scholes setting
Q17: By augmenting the geometric Brownian motion process
Q18: The current stock price is $100.A $101--strike