Accuracy of Implied Volatility Approximations Using "Nearest-to-the-Money" Option Premiums

Implied volatility is a useful bit of information for futures and options hedgers and speculators. However, extraction of implied volatility from Black-Scholes (BS) option pricing model requires a numeric search. Since 1988, there have been numerous simplifying modifications to the BS formula proposed and presented in the applied economics and finance literature to allow approximation of implied volatility directly. This study identifies and tests these simplification methods for accuracy for call only and put-call average elicitation of an implied volatility estimate. Results show that accuracy varies by method and whether call only or put-call average approaches are applied.


Subject(s):
Issue Date:
2007
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/34927
Total Pages:
26
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-04-26

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