Volatility Implied by Option Prices: The Case of Takeover Bids

Daniella Acker and Cliff Attfield

Journal of Business Finance & Accounting, 2000, vol. 27, issue 5‐6, 679-710

Abstract: We model the effect of an impending share price jump on the implied standard deviation (ISD) of a company’s options, testing the model by investigating its predictive ability for ISDs of companies subject to a takeover bid. Our model fits the observed ISDs well for all but certain deep in‐the‐money options. However, the model demonstrates that a discontinuity in the relationship between moneyness and the ISD both explains the combination of high and zero ISDs exhibited by these options, and impairs the predictive power of the model at these levels of moneyness.

Date: 2000
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https://doi.org/10.1111/1468-5957.00330

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:27:y:2000:i:5-6:p:679-710

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Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

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