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Impact of volatility estimation method on theoretical option values

Author

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  • Borkowski, Bolesław
  • Krawiec, Monika
  • Shachmurove, Yochanan

Abstract

The volatility of an asset price measures how uncertain we are about future asset price movements. It is one of the factors affecting option price and the only input into the Black–Scholes model that cannot be directly observed. Thus, estimating volatility properly is vital. Two approaches to calculating volatility are historical and implied volatilities. Using index options listed on the Chicago Board of Options Exchange, this paper focuses on historical volatility. Since numerous methods of estimating volatility may provide different results, this paper assesses the impact of volatility estimation method on theoretical option values.

Suggested Citation

  • Borkowski, Bolesław & Krawiec, Monika & Shachmurove, Yochanan, 2013. "Impact of volatility estimation method on theoretical option values," Global Finance Journal, Elsevier, vol. 24(2), pages 119-128.
    • Handle: RePEc:eee:glofin:v:24:y:2013:i:2:p:119-128
    DOI: 10.1016/j.gfj.2013.07.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Historical volatility; Option premium; Index options; Black–Scholes–Merton model; Chicago Board of Options Exchange;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G0 - Financial Economics - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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