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Volatility smiles when information is lagged in prices

Gianluca Marcato (), Tumellano Sebehela and Carlos Heitor Campani ()

The North American Journal of Economics and Finance, 2018, vol. 46, issue C, 151-165

Abstract: This study explores volatility smiles when stock market information is lagged, specifically in the REIT industry. A usual requirement is that REITs can only disseminate information relating to their property valuations once per year; therefore, this leads to the lagging effect. Within the context of exchange options (i.e. mergers), it seems that no study has researched on this theme. This article uses the Black & Scholes model to calculate implied volatilities and their corresponding implied options to illustrate arbitrage opportunities when exchange options emerge. The results illustrate that implied volatilities are different from non-implied volatilities. Further, arbitrage is still higher among REITs as opposed to other capital market instruments. Finally, just like other capital market instruments, REIT acquisitions generate alpha.

Keywords: Exchange option; Lagged; Volatility smile (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.najef.2018.03.004

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Handle: RePEc:eee:ecofin:v:46:y:2018:i:c:p:151-165