Extracting information on implied volatilities and discrete dividends from American options prices
This contribution deals with options on assets which pay cash dividends. Pricing methods which consider discrete dividends are usually computationally expensive; a first purpose of this paper is to study efficient and accurate numerical procedures which yield consistent prices for both European and American options in the presence of discrete dividends. We then analyze some methodologies to extract information on volatilities and dividends from observable option prices. Implied dividends can also be computed using a modified version of the well known put-call parity relationship. This technique is straightforward, nevertheless, its use is limited to European options and, when dealing with equities, most traded options are of American-type. As an alternative, numerical inversion of pricing methods can be used. We apply different procedures to obtain implied volatilities and dividends of listed stocks of the Italian Derivatives Market.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.unive.it/dip.economia
More information through EDIRC
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.:
- Carlos Veiga & Uwe Wystup, 2009. "Closed Formula for Options with Discrete Dividends and Its Derivatives," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(6), pages 517-531.
- Geske, Robert, 1981. "Comments on Whaley's note," Journal of Financial Economics, Elsevier, vol. 9(2), pages 213-215, June.
- Whaley, Robert E., 1981. "On the valuation of American call options on stocks with known dividends," Journal of Financial Economics, Elsevier, vol. 9(2), pages 207-211, June.
- Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
- Brooks, Raymond M., 1994. "Dividend predicting using put-call parity," International Review of Economics & Finance, Elsevier, vol. 3(4), pages 373-392.
- Antonella Basso & Martina Nardon & Paolo Pianca, 2004. "A two-step simulation procedure to analyze the exercise features of American options," Decisions in Economics and Finance, Springer, vol. 27(1), pages 35-56, 08.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- M. H. Vellekoop & J. W. Nieuwenhuis, 2006. "Efficient Pricing of Derivatives on Assets with Discrete Dividends," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(3), pages 265-284.
When requesting a correction, please mention this item's handle: RePEc:ven:wpaper:2012_25. 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: (Geraldine Ludbrook)
If references are entirely missing, you can add them using this form.