Significance of Volatility in Option Pricing

Pochea Maria-Miruna and Filip Angela-Maria ()
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Pochea Maria-Miruna: „Babe?-Bolyai” University of Cluj-Napoca Faculty of Economics and Business Administration
Filip Angela-Maria: „Babe?-Bolyai” University of Cluj-Napoca Faculty of Economics and Business Administration

Ovidius University Annals, Economic Sciences Series, 2013, vol. XIII, issue 1, 1440-1444

Abstract: This paper examines the significance of volatility in option pricing considering that the option’s theoretical price depends on the accuracy of this parameter’s estimation. One of the assumptions of Black-Scholes model according to which the volatility is a constant parameter and may be determined based on historical data is not realistic. Thus it is considered that a more appropriate estimate of volatility is implied volatility. This study investigates the correlation between implied volatility and strike price known as volatility smile and the relationship between volatility and option’ s maturity – the volatility term structure. Testing these correlations on the Romanian options market is quite difficult because of the low market’s liquidity.

Keywords: volatility smile; volatility skew; volatility term structure; volatility surface. (search for similar items in EconPapers)
JEL-codes: G11 G13 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:ovi:oviste:v:xii:y:2012:i:1:p:1440-1444

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