Title :
Implied volatility functions: empirical tests
Author :
Dumas, Bernard ; Fleming, Jeff ; Whaley, Robert E.
Author_Institution :
Fuqua Sch. of Bus., Duke Univ., Durham, NC, USA
Abstract :
Black and Scholes (1973) implied volatilities tend to be systematically related to the option´s exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black/Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset´s return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S and P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DVF option valuation model
Keywords :
financial data processing; stock markets; asset price; asset return; deterministic function; deterministic volatility function option valuation model; economic significance; empirical tests; expiration time; hedging performance; implied volatility functions; index options; option exercise price; option price cross section; predictive performance; Computer crashes; Cost accounting; Economic forecasting; Europe; Finance; Financial management; Frequency; Predictive models; Springs; System testing;
Conference_Titel :
Computational Intelligence for Financial Engineering, 1996., Proceedings of the IEEE/IAFE 1996 Conference on
Conference_Location :
New York City, NY
Print_ISBN :
0-7803-3236-9
DOI :
10.1109/CIFER.1996.501845
