Implied volatility smiles in the Nikkei 225 options

This article analyses volatility smiles in the Nikkei 225 options by taking the Generalized Autoregressive Conditional Heteroscedastic (GARCH) effects on smiles and the asymmetry of option values with respect to option bid--ask spreads into account. Our empirical results show the evidence for the asymmetry in call and put option values, where the option values appear to be closer to bid than to ask quotes. We also find that this asymmetry has an effect on the mitigation of volatility smiles. Furthermore, when we take both the asymmetry and the GARCH into account in the estimation of option-implied volatilities, we find considerably less evidence for volatility smiles.