Studies on implied volatility from option prices.
Implied volatility is an elusive attribute in the Black-Scholes Model that is unobservable, yet important for investors to price options. The objective of our study is to study and make reasonable claims on the trends we observed from our results, primarily derived from data in the Asian and US mark...
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Main Authors: | , , |
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Format: | Final Year Project |
Language: | English |
Published: |
2009
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Subjects: | |
Online Access: | http://hdl.handle.net/10356/15030 |
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Institution: | Nanyang Technological University |
Language: | English |
Summary: | Implied volatility is an elusive attribute in the Black-Scholes Model that is unobservable, yet important for investors to price options. The objective of our study is to study and make reasonable claims on the trends we observed from our results, primarily derived from data in the Asian and US markets. The Newton-Raphson method is used to derive the implied volatilities from market prices of options and subsequently used to plot the implied volatility curves. We also fit the implied volatility curves with a quadratic function to capture the convexity of the volatility smile/sneer. Our results are three-fold. First, the market in which an index operates dominates the average implied volatilities of the index option rather than the type and maturity of an option. Second, puts are found to be more indicative in their direction of implied volatility skews than calls in times of changing stock price. This is based on investors being more willing to switch premiums on puts rather than calls and may be due to the “insurance premium” that investors perceive puts to have. Third, the convexity for implied volatility curves on shorter term options were found to be higher than that of longer term options and results on specific quarters do not seem to be more meaningful than those on specific years. Our results are largely consistent with the observations by previous researchers and provide new insights into quantifying the implied volatility curve. |
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