IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

A Bayesian Approach to Modeling Stock Return Volatility for Option Valuation

Listed author(s):
  • Karolyi, G. Andrew

New measures of stock return volatility are developed to increase the precision of stock option price estimates. With Bayesian statistical methods, volatility estimates for a given stock are developed using prior information on the cross-sectional patterns in return volatilities for groups of stocks sorted on size, financial leverage, and trading volume. Call option values computed with the Bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility, standard historical volatility, or even the actual ex post volatility that occurred during each option's life. Although the Bayesian methods produce biased call price estimators, they do reduce the systematic tendency of standard pricing approaches to overprice (underprice) options on high (low) volatility stocks. Little bias improvement is observed with respect to the time to maturity and moneyness of the call options.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: link to article abstract page
Download Restriction: no

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 28 (1993)
Issue (Month): 04 (December)
Pages: 579-594

in new window

Handle: RePEc:cup:jfinqa:v:28:y:1993:i:04:p:579-594_00
Contact details of provider: Postal:
Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK

Web page:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:28:y:1993:i:04:p:579-594_00. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.