Modeling and Estimating Volatility of Options on Standard & Poor’s 500 Index

Bolseslaw Borkowski (), Monika Krawiec () and Yochanan Shachmurove
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Bolseslaw Borkowski: Department of Econometrics and Statistics, Warsaw University of Life Sciences
Monika Krawiec: Department of Econometrics and Statistics, Warsaw University of Life Sciences

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating volatility is crucial. Two approaches to estimate volatility are implied volatility and historical prices. Iterative techniques are applied, based on daily S&P index options. Additionally, using option data on S&P 500 Index listed on the Chicago Board of Options Exchange, historical volatility can be estimated.

Keywords: historical volatility; option premium; index options; Black-Scholes-Merton model; Chicago Board of Options Exchange (search for similar items in EconPapers)
JEL-codes: C0 C01 C2 C58 D53 G0 G13 G17 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2013-02-01
New Economics Papers: this item is included in nep-mst
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