Journal ArticleDOI
Time varying volatilities and calculation of the weighted implied standard deviation
TLDR
In this paper, an expiration-specific weighted implied standard deviation (WISD) was proposed to detect ex-post stock return variances that differ between small and large market capitalization firms.Abstract:
Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devising an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basically similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of expiration-specific WISDs, as opposed to standard composite WISDs, results in improved performance of option pricing models.read more
Citations
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Journal ArticleDOI
The term structure of volatility implied by foreign exchange options
Xinzhong Xu,Stephen Taylor +1 more
TL;DR: In this article, regression and Kalman filtering methods are used to estimate the time-varying term structure of volatility expectations revealed by options prices, which can be used to value OTC options, to improve hedging strategies, and to test the hypothesis that the options market overreacts.
Journal ArticleDOI
A note on a simple, accurate formula to compute implied standard deviations
TL;DR: This paper derived a simple, accurate formula to compute implied standard deviations for options priced in the classic framework developed by Black and Scholes (1973) and Merton (1973), when a stock price is equal to a discounted strike price, this formula reduces to a formula provided by Brenner and Subrahmanyam (1988).
Journal ArticleDOI
Improving the pricing of options: a neural network approach
TL;DR: In this article, the authors apply statistical inference techniques to build neural network models which are able to explain the prices of call options written on the German stock index DAX, by testing for the explanatory power of several variables serving as network inputs, some insight into the pricing process of the option market is obtained.
Posted Content
Market Risk and the Concept of Fundamental Volatility
Soosung Hwang,Steve Satchell +1 more
TL;DR: In this paper, the unobserved fundamental component of volatility was proposed as a measure of risk, which may be more meaningful than observed volatility for market regulators, and the analysis showed that introducing European options reduces fun-damental volatility, while transitory noise in the underlying and futures markets does not show significant change.
Journal ArticleDOI
Market risk and the concept of fundamental volatility: Measuring volatility across asset and derivative markets and testing for the impact of derivatives markets on financial markets
Soosung Hwang,Stephen Satchell +1 more
TL;DR: In this paper, the authors propose an unobserved fundamental component of volatility as a measure of risk, which can be obtained using a stochastic volatility model, which allows filtering out the signal in the volatility information.
References
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Journal ArticleDOI
The Pricing of Options and Corporate Liabilities
Fischer Black,Myron S. Scholes +1 more
TL;DR: In this paper, a theoretical valuation formula for options is derived, based on the assumption that options are correctly priced in the market and it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks.
Book
Theory of rational option pricing
TL;DR: In this paper, the authors deduced a set of restrictions on option pricing formulas from the assumption that investors prefer more to less, which are necessary conditions for a formula to be consistent with a rational pricing theory.
Journal ArticleDOI
The stochastic behavior of common stock variances : value, leverage and interest rate effects
TL;DR: The authors examined the relation between the variance of equity returns and several explanatory variables and found that equity variances have a strong positive association with both financial leverage and, contrary to the predictions of the options literature, interest rates.
Journal ArticleDOI
Fact and Fantasy in the Use of Options
TL;DR: In this paper, Fact and Fantasy in the Use of Options: Fact and fantasy in the use of options, the authors present a survey of options and their use in financial markets.
Journal ArticleDOI
Marginal Stockholder Tax Rates and the Clientele Effect
Edwin J. Elton,Martin J. Gruber +1 more
TL;DR: In this paper, the authors present and test a method of determining marginal stockholder tax brackets and explore the implications of their findings for corporate investment policy, corporate dividend policy, and the assumption of market rationality.
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