 Asymmetric information about volatility: How does it affect implied volatility, option prices and market liquidity?Saikat Nandi Review of Derivatives Research, 2000, vol. 3, issue 3, 215-236 Abstract: This paper develops a model of asymmetric information in which an investor has information regarding the future volatility of the price process of an asset and trades an option on the asset. The model relates the level and curvature of the smile in implied volatilities as well as mispricing by the Black-Scholes model to net options order flows (to the market maker). It is found that an increase in net options order flows (to the market maker) increases the level of implied volatilities and results in greater mispricing by the Black-Scholes model, besides impacting the curvature of the smile. The liquidity of the option market is found to be decreasing in the amount of uncertainty about future volatility that is consistent with existing evidence. Copyright Kluwer Academic Publishers 2000 Keywords: asymmetric information; Black-Scholes; implied volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:revdev:v:3:y:2000:i:3:p:215-236 Ordering information: This journal article can be ordered from Access Statistics for this article Review of Derivatives Research is currently edited by Gurdip Bakshi and Dilip Madan More articles in Review of Derivatives Research from Springer |
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