Volatility: Expectations and Realizations

R. Peters and Roy van der Weide (rvanderweide@worldbank.org)

No 12-04, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Embedded in option prices are market expectations regarding future volatility. While the assumption of rational expectations has been a popular paradigm, it is difficult to ignore the subjective nature of expectations. The objective of this paper is to make market expectations visible as they evolve over time, and to price options in line with prevailing expectations, be they rational or non-rational. We put forward an analytically convenient option pricing framework that accommodates both stochastic volatility and asymmetric volatility. Daily estimates of the implied pdf of volatility are obtained by estimating the option pricing model one day at a time. We do not impose too much structure on how expectations are updated over time, but allow market expectations to take their course.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://cendef.uva.nl/binaries/content/assets/subsi ... 11.pdf?1363339486645 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://cendef.uva.nl/binaries/content/assets/subsites/amsterdam-school-of-economics/amsterdam-school-of-economics-research-institute/cendef/working-papers-2012/volatility---smile_dec2011.pdf?1363339486645 [302 Moved Temporarily]--> https://cendef.uva.nl/binaries/content/assets/subsites/amsterdam-school-of-economics/amsterdam-school-of-economics-research-institute/cendef/working-papers-2012/volatility---smile_dec2011.pdf?1363339486645)

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:ams:ndfwpp:12-04

Access Statistics for this paper

More papers in CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands. Contact information at EDIRC.
Bibliographic data for series maintained by Cees C.G. Diks (c.g.h.diks@uva.nl).