Volatility estimation from observed option prices

Phelim P. Boyle and Draviam Thangaraj

Decisions in Economics and Finance, 2000, vol. 23, issue 1, 52 pages

Abstract: It is well established that the standard Black-Scholes model does a very poor job in matching the prices of vanilla European options. The implied volatility varies by both time to maturity and by the moneyness of the option. One approach to this problem is to use the market option prices to back out a local volatility function that reproduces the market prices. Since option price observations are only available for a limited set of maturities and strike prices, most algorithms require a smoothing technique to implement this approach. In this paper we modify the implementation of Andersen and Brotherton-Ratcliffe to provide another way of dealing with this issue. Numerical examples indicate that our approach is reasonably successful in reproducing the input prices.

Date: 2000-07-24
Note: Received: 22 December 1999
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.de/link/service/journals/10203/papers/0023001/00230031.pdf (application/pdf)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:decfin:v:23:y:2000:i:1:p:31-52

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/10203/PS2

Access Statistics for this article

Decisions in Economics and Finance is currently edited by Paolo Ghirardato

More articles in Decisions in Economics and Finance from Springer, Associazione per la Matematica
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().