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Extracting information on implied volatilities and discrete dividends from American options prices

  • Martina Nardon

    ()

    (Department of Economics, University Of Venice Cà Foscari)

  • Paolo Pianca

    (pianca@unive.it)

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.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_nardon_pianca_25_12.pdf
File Function: First version, 2012
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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_25.

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Length: 25
Date of creation: 2012
Date of revision:
Handle: RePEc:ven:wpaper:2012_25
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  1. 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.
  2. 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.
  3. 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.
  4. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
  5. 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.
  6. 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.
  7. Brooks, Raymond M., 1994. "Dividend predicting using put-call parity," International Review of Economics & Finance, Elsevier, vol. 3(4), pages 373-392.
  8. Geske, Robert, 1981. "Comments on Whaley's note," Journal of Financial Economics, Elsevier, vol. 9(2), pages 213-215, June.
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