Implied Variance Estimates for Black–Scholes and CEV OPM: Review and Comparison

Cheng Few Lee, Yibing Chen and John Lee

Chapter 104 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 3411-3444 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The main purpose of this chapter is to demonstrate how to estimate implied variance for both the Black–Scholes option pricing model (OPM) and the constant elasticity of variance (CEV) OPM. For the Black–Scholes OPM model, we classify them into two different estimation routines: numerical search methods and closed-form derivation approaches. Both the MATLAB approach and approximation method are used to empirically estimate implied variance for American and Chinese options. For the CEV model, we present the theory and demonstrate how to use a related Excel program in detail.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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