Modeling and Estimating Volatility of Options on Standard & Poor’s 500 Index
AbstractThis paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating volatility is crucial. Two approaches to estimate volatility are implied volatility and historical prices. Iterative techniques are applied, based on daily S&P index options. Additionally, using option data on S&P 500 Index listed on the Chicago Board of Options Exchange, historical volatility can be estimated.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-015.
Length: 21 pages
Date of creation: 01 Feb 2013
Date of revision:
historical volatility; option premium; index options; Black-Scholes-Merton model; Chicago Board of Options Exchange;
Find related papers by JEL classification:
- C0 - Mathematical and Quantitative Methods - - General
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G0 - Financial Economics - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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