Time Varying Volatilities and Calculation of the Weighted Implied Standard Deviation

Bruce Resnick, Aamir M. Sheikh and Yo-Shin Song

Journal of Financial and Quantitative Analysis, 1993, vol. 28, issue 3, 417-430

Abstract: Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devising an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basically similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of expiration-specific WISDs, as opposed to standard composite WISDs, results in improved performance of option pricing models.

Date: 1993
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