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The estimation of implied volatility from the Black-Scholes model: some new formulas and their applications

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Author Info
Steven Li
Abstract

This paper provides a more accurate formula for estimating the implied volatilities for at-the-money calls than the existing formula as developed previously by Brenner and Subrahmanyam (1988). New formulas are also given for estimating the implied volatilities of in- or out-of-the-money calls. These formulas are derived mathematically and assessed by using numerical tests. All the new formulas are easy to use and accurate for a wide range of option moneyness and time to expiration.

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File URL: http://www.bus.qut.edu.au/faculty/schools/economics/documents/discussionPapers/2003/DP%20141%20Li.pdf
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Publisher Info
Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 141.

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Date of creation: 20 Feb 2003
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Handle: RePEc:qut:dpaper:141

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Web page: http://www.bus.qut.edu.au/faculty/schools/economics/
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Related research
Keywords: options; implied volatility; implied standard deviation;

Find related papers by JEL classification:
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

References listed on IDEAS
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  1. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  2. Chance, Don M, 1996. "A Generalized Simple Formula to Compute the Implied Volatility," The Financial Review, Eastern Finance Association, vol. 31(4), pages 859-67, November.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  4. Chambers, Donald R & Nawalkha, Sanjay K, 2001. "An Improved Approach to Computing Implied Volatility," The Financial Review, Eastern Finance Association, vol. 36(3), pages 89-99, August.
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This page was last updated on 2009-11-29.

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