The Stochastic Behaviour of Market Variance Implied in the Prices of Index Options

Julian R Franks and Eduardo S Schwartz

Economic Journal, 1991, vol. 101, issue 409, 1460-75

Abstract: The purpose of this paper is to examine the time series properties of volatilities, and to consider various financial and real variables that may be correlated with innovations in expected volatility. The measure used in this study is the Black-Scholes volatility implied in weekly call option prices written on the spot price of the FTSE Index, a U.K. market equity index. First the authors determine if capital structure can explain the relation between changes in the volatility of equity and structure can explain the relation between changes in the volatility of equity and changes in the level of the index. Second, they analyze whether innovations in the volatilities of prices of real variables could also explain changes in equity volatility, including the volume of transactions in equities, oil prices, exchange rates, nominal and real interest rates, and inflation. Copyright 1991 by Royal Economic Society.

Date: 1991
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