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Implied Volatility Functions: Empirical Tests

Author

Listed:
  • Bernard Dumas

    (Hautes √Čtudes Commerciales (HEC) School of Management; Fuqua School of Business, Duke University; National Bureau of Economic Research (NBER); and Center for Economic Policy Research (CEPR),)

  • Jeff Fleming

    (Jones Graduate School of Administration, Rice University,)

  • Robert E. Whaley

    (Fuqua School of Business, Duke University)

Abstract

Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function (DVF) option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black-Scholes (1973) implied volatilities across exercise prices and times to expiration. Copyright The American Finance Association 1998.

Suggested Citation

  • Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:6:p:2059-2106
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