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Option markets and implied volatility: Past versus present

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  • Mixon, Scott
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    Abstract

    Traders in the nineteenth century appear to have priced options the same way that twenty-first-century traders price options. Empirical regularities relating implied volatility to realized volatility, stock prices, and other implied volatilities (including the volatility skew) are qualitatively the same in both eras. Modern pricing models and centralized exchanges have not fundamentally altered pricing behavior, but they have generated increased trading volume and a much closer conformity in the level of observed and model prices. The major change in pricing is the sharp decline in implied volatility relative to realized volatility, evident immediately upon the opening of the CBOE.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 94 (2009)
    Issue (Month): 2 (November)
    Pages: 171-191

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    Handle: RePEc:eee:jfinec:v:94:y:2009:i:2:p:171-191

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    Web page: http://www.elsevier.com/locate/inca/505576

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    Keywords: Options Implied volatility;

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    Cited by:
    1. Bakshi, Gurdip & Panayotov, George & Skoulakis, Georgios, 2011. "Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios," Journal of Financial Economics, Elsevier, vol. 100(3), pages 475-495, June.
    2. Haug, Espen Gaarder & Taleb, Nassim Nicholas, 2011. "Option traders use (very) sophisticated heuristics, never the Black-Scholes-Merton formula," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 97-106, February.

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