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Time Varying Volatilities and Calculation of the Weighted Implied Standard Deviation

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  • Resnick, Bruce G.
  • Sheikh, Aamir M.
  • Song, Yo-Shin

Abstract

Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devising an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basically similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of expiration-specific WISDs, as opposed to standard composite WISDs, results in improved performance of option pricing models.

Suggested Citation

  • Resnick, Bruce G. & Sheikh, Aamir M. & Song, Yo-Shin, 1993. "Time Varying Volatilities and Calculation of the Weighted Implied Standard Deviation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(3), pages 417-430, September.
    • Handle: RePEc:cup:jfinqa:v:28:y:1993:i:03:p:417-430_00
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    Cited by:

    1. Hwang, Soosung & Satchell, Stephen E., 2000. "Market risk and the concept of fundamental volatility: Measuring volatility across asset and derivative markets and testing for the impact of derivatives markets on financial markets," Journal of Banking & Finance, Elsevier, vol. 24(5), pages 759-785, May.
    2. Anders, Ulrich & Korn, Olaf & Schmitt, Christian, 1996. "Improving the pricing of options: a neural network approach," ZEW Discussion Papers 96-04, ZEW - Leibniz Centre for European Economic Research.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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