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Implied Volatility Trees And Pricing Performance: Evidence From The S&P 100 Options

  • CHARILAOS E. LINARAS

    (Technical Division, EKO-ELDA A.B.E.E., Hellenic Petroleum Group S.A., Athens, Greece)

  • GEORGE SKIADOPOULOS

    ()

    (Department of Banking and Financial Management, University of Piraeus, Karaoli & Dimitriou 80, 18534 Piraeus, Greece; Financial Options Research Centre, Warwick Business School, University of Warwick, UK)

This paper examines the pricing performance of various discrete-time option models that accept the variation of implied volatilities with respect to the strike price and the time-to-maturity of the option (implied volatility tree models). To this end, data from the S&P 100 options are employed for the first time. The complex implied volatility trees are compared to the standard Cox–Ross–Rubinstein model and the ad-hoc traders model. Various criteria and interpolation methods are used to evaluate the performance of the models. The results have important implications for the pricing accuracy of the models under scrutiny and their implementation.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 08 (2005)
Issue (Month): 08 ()
Pages: 1085-1106

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Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:08:p:1085-1106
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