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Abstract
This study investigated the performance of Black's European model and
Barone-Adesi and Whaley ' s American model in pricing live cattle and feeder
cattle futures options. One historical and three implied volatility
estimators were employed. The live cattle sample period was October 31 , 1984
through September 30, 1988. The feeder cattle sample period was January 4,
1988 through September 30, 1988. One observation per day was collected for
all put and call contracts and all strike prices. Contemporaneous futures
prices were collected to match the put and call observation~
Black ' s European model was as accurate in predicting premiums as Barone-Adesi
and Whaley ' s American model across all volatility estimates and opt ion
contracts. Implied volatility estimates generated substantially more accurate
forecasts of actual option premia than historical volatility. Small
differences were found in the predictive ability among the three implied
volatility estimates .
The significance and signs of the coefficients and explanatory power of
the bias regressions were generally consistent across both option pricing
models , suggesting that little difference in biases existed between the
American and European model. Generally, fewer coefficients were significant
in the implied volatility equations compared to the historical volatility
equations. In addition, the magnitude of bias associated with variables in
the implied volatility equations was substantially less than that of variables
in historical volatility equations. Finally, it was found that none of the
variables input into the option pricing models (time-to-maturity , moneyness ,
volatility, and the riskless interest rate) displayed consistent, significant
coefficients across markets and option type.