In pricing primary-market options and in making secondary markets, financial intermediaries depend on the quality of forecasts of the variance of the underlying assets. Hence, the gain from improved pricing of options would be a measure of the value of a forecast of underlying asset returns. NYSE index returns over the period of 1968-1991 are used to suggest that pricing index options of up to 90-days maturity would be more accurate when: (1) using ARCH specifications in place of a moving average of squared returns; (2) using Hull and White's (1987) adjustment for stochastic variance in Black and Scholes's (1973) formula; (3) accounting explicitly for weekends and the slowdown of variance whenever the market is closed.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4519.
Length: Date of creation: Nov 1993 Date of revision: Publication status: published as review of derivatives research, vol. 1, 139-157. Handle: RePEc:nbr:nberwo:4519
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Brenner, Menachem & Galai, Dan, 1986.
"Implied Interest Rates,"
Journal of Business,
University of Chicago Press, vol. 59(3), pages 493-507, July.
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