Liquidity Considerations in Estimating Implied Volatility
Some option series in the market are far less liquid than others. Market illiquidity can reduce the informativeness of option prices. In this paper, we propose alternative schemes to estimate implied volatility while reducing the importance attached to illiquid options. Using data for index options traded at the National Stock Exchange in India, we and that the performance of a liquidity weighted scheme is superior to that of more conventional schemes such as the vega weights, the volatility elasticity weights and the traditional vxo. Liquidity weights offers the possibility of improved implied volatility estimation in situations where there is strong cross-sectional variation in option market liquidity.
(This abstract was borrowed from another version of this item.)
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Volume (Year): 32 (2012)
Issue (Month): 8 (08)
|Contact details of provider:|| Web page: http://www.interscience.wiley.com/jpages/0270-7314/|
|Order Information:|| Web: http://www.blackwellpublishing.com/subs.asp?ref=0270-7314 Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heynen, Ronald & Kemna, Angelien & Vorst, Ton, 1994. "Analysis of the Term Structure of Implied Volatilities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 31-56, March.
- U. �etin & R. Jarrow & P. Protter & M. Warachka, 2006. "Pricing Options in an Extended Black Scholes Economy with Illiquidity: Theory and Empirical Evidence," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 493-529.
- Peter Reinhard Hansen & Asger Lunde & James M. Nason, 2003.
"Choosing the best volatility models: the model confidence set approach,"
2003-28, Federal Reserve Bank of Atlanta.
- Peter Reinhard Hansen & Asger Lunde & James M. Nason, 2003. "Choosing the Best Volatility Models: The Model Confidence Set Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 839-861, December.
- Peter Hansen & Asger Lunde & James M. Nason, 2003. "Choosing the Best Volatility Models:The Model Confidence Set Approach," Working Papers 2003-05, Brown University, Department of Economics.
- Becker, Ralf & Clements, Adam E., 2008.
"Are combination forecasts of S&P 500 volatility statistically superior?,"
International Journal of Forecasting,
Elsevier, vol. 24(1), pages 122-133.
- Ralf Becker & Adam Clements, 2007. "Are combination forecasts of S&P 500 volatility statistically superior?," NCER Working Paper Series 17, National Centre for Econometric Research.
- Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
- Menachem Brenner & Rafi Eldor & Shmuel Hauser, 1999.
"The Price of Options Illiquidity,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
99-086, New York University, Leonard N. Stern School of Business-.
- Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
- Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:32:y:2012:i:8:p:714-741. 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: (Wiley-Blackwell Digital Licensing)or ()
If references are entirely missing, you can add them using this form.