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Call and put implied volatilities and the derivation of option implied trees

  • V. Moriggia

    ()

  • S. Muzzioli

    ()

  • C. Torricelli

    ()

Standard methodologies for the derivation of implied trees from option prices are based on the validity of the put-call parity. Muzzioli and Torricelli (2002) propose a methodology which accounts for PCP violations. Based on this latter approach the present paper advances in two main directions. First we propose a different methodology in order to imply the interval of artificial probabilities at each node of the tree. Secondly, we perform an empirical validation of the implied tree obtained, both in the sample and out of sample, by using DAX index options data set covering the period from January 4, 1999 to December 28, 2000. Numerical results are compared with one of the most used standard methodologies, i.e. Derman and Kani’s. The results suggest that the estimation proposed, by taking into account the informational content of both call and put prices, highly improves both the in-the-sample fitting and the out-of-sample performance.

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File URL: http://www.dep.unimore.it/materiali_discussione/0448.pdf
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Paper provided by University of Modena and Reggio E., Faculty of Economics "Marco Biagi" in its series Department of Economics with number 0448.

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Length: pages 22
Date of creation: Nov 2003
Date of revision:
Publication status: Published in Frontiers In Finance and Economics, vol.4, 1, pp. 35-64 (2007)
Handle: RePEc:mod:depeco:0448
Contact details of provider: Web page: http://www.economia.unimore.it/

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