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Modeling and Estimating Volatility of Options on Standard & Poor’s 500 Index

Author

Listed:
  • Boleslaw Borkowski

    (Department of Econometrics and Statistics, Warsaw University of Life Sciences)

  • Monika Krawiec

    (Department of Econometrics and Statistics, Warsaw University of Life Sciences)

  • Yochanan Shachmurove

    (Department of Economics and Business, The City College of the City University of New York)

Abstract

This 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.

Suggested Citation

  • Boleslaw Borkowski & Monika Krawiec & Yochanan Shachmurove, 2013. "Modeling and Estimating Volatility of Options on Standard & Poor’s 500 Index," PIER Working Paper Archive 13-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:13-015
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    historical volatility; option premium; index options; Black-Scholes-Merton model; Chicago Board of Options Exchange;
    All these keywords.

    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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