Implied volatility and the risk-free rate of return in options markets

Marcelo Bianconi, Scott MacLachlan and Marco Sammon

The North American Journal of Economics and Finance, 2015, vol. 31, issue C, 1-26

Abstract: We numerically solve systems of Black–Scholes formulas for implied volatility and implied risk-free rate of return. After using a seemingly unrelated regressions (SUR) model to obtain point estimates for implied volatility and implied risk-free rate, the options are re-priced using these parameters. After repricing, the difference between the market price and model price is increasing in time to expiration, while the effect of moneyness and the bid-ask spread are ambiguous. Our varying risk-free rate model yields Black–Scholes prices closer to market prices than the fixed risk-free rate model. In addition, our model is better for predicting future evolutions in model-free implied volatility as measured by the VIX.

Keywords: Re-pricing options; Forecasting volatility; Seemingly unrelated regression; Implied volatility (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:31:y:2015:i:c:p:1-26

DOI: 10.1016/j.najef.2014.10.003

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