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Implied volatility and investor beliefs in experimental asset markets

Author

Listed:
  • Ackert, Lucy F.
  • Kluger, Brian D.
  • Qi, Li

Abstract

Investor expectations move markets so the ability to measure beliefs is critical for market participants. Though the volatility implied by traded option prices is a popular gauge of beliefs, our understanding of its usefulness is incomplete. Our experimental markets feature a stock and a call option. The stock has two possible outcomes and the distance between the outcomes is our measure of volatility. The outcome range is not always announced. Regardless of whether it is announced and despite observed mispricing of the two assets, knowledge of the range implied by trading prices informs observers about subjects' beliefs concerning volatility.

Suggested Citation

  • Ackert, Lucy F. & Kluger, Brian D. & Qi, Li, 2019. "Implied volatility and investor beliefs in experimental asset markets," Journal of Financial Markets, Elsevier, vol. 43(C), pages 121-136.
  • Handle: RePEc:eee:finmar:v:43:y:2019:i:c:p:121-136
    DOI: 10.1016/j.finmar.2019.02.001
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    References listed on IDEAS

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    More about this item

    Keywords

    VIX; Implied volatility; Option market; Investor beliefs;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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