Impact of volatility estimation method on theoretical option values

Bolesław Borkowski, Monika Krawiec and Yochanan Shachmurove

Global Finance Journal, 2013, vol. 24, issue 2, 119-128

Abstract: The volatility of an asset price measures how uncertain we are about future asset price movements. It is one of the factors affecting option price and the only input into the Black–Scholes model that cannot be directly observed. Thus, estimating volatility properly is vital. Two approaches to calculating volatility are historical and implied volatilities. Using index options listed on the Chicago Board of Options Exchange, this paper focuses on historical volatility. Since numerous methods of estimating volatility may provide different results, this paper assesses the impact of volatility estimation method on theoretical option values.

Keywords: Historical volatility; Option premium; Index options; Black–Scholes–Merton model; Chicago Board of Options Exchange (search for similar items in EconPapers)
JEL-codes: C0 C2 C58 D53 G0 G13 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:24:y:2013:i:2:p:119-128

DOI: 10.1016/j.gfj.2013.07.004

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