In this paper we investigate the profitability of 'skewness trades' and 'kurtosis trades' based on comparisons of implied state price densities versus historical densities. In particular, we examine the ability of SPD comparisons to detect structural breaks in the options market behaviour. While...

Equity index implied volatility functions are known to be excessively skewed in comparison with implied volatility at the single stock level. We study this stylized fact for the case of a major German stock index, the DAX, by recovering index implied volatility from simulating the 30 dimensional...