Implied volatility


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Implied volatility

The expected volatility in a stock's return derived from its option price, maturity date, exercise price, and riskless rate of return, using an option pricing model such as Black-Scholes.

Implied Volatility

An estimation of the volatility of a stock as calculated by the price of an option on that stock. The factors used in determining a stock's implied volatility are the maturity date, exercise price, and riskless rate of return. One of the most common models used in estimating implied volatility is the Black-Scholes Option Pricing Model.
References in periodicals archive ?
The implied volatility in foreign exchange options trading is an indication of expected exchange rate volatility.
The following studies focused on regime switching of the implied volatility index.
While the historical volatility of an asset return is readily computed from observed asset returns and the implied volatility is computed from observed option price there may be inaccurate estimators of the volatility expected to prevail over a period of time.
Now, we are going to derive an approximated implied volatility surface of second order in the log-moneyness.
The VIX is calculated using options on the S&P 500; thus, the same implied volatility that is priced into options on the S&P 500 is used to power the VIX.
They test the relationship using multiple regression framework where realized volatility (RV) is regressed against non market maker demand for volatility along with a set of control variables (lags of RV, lags of implied volatility, dummy for earning announcement date, stock volume and options volume).
Latane and Rendleman (1976) and Chiras and Manaster (1978) showed in their studies that weighted implied volatility of the return of the stocks is a better estimator of future volatility than historical standard deviation.
Although Canina and Figlewski (1993) reported that implied volatility has virtually no correlation with future return volatility and did not incorporate information contained in recent observed volatility, Christensen and Prabhala (1998) found that implied volatility outperformed past volatility in forecasting future volatility and even subsumed the information content of past volatility in some of their specifications.
Day & Lewis (1992) and Lamoureux & Lastrapes (1993) concluded that implied volatility is a biased and inefficient forecast of future volatility and that historical volatility contains more information about future volatility than does implied volatility.
And while historical volatility has also fallen from its peaks, the decline in implied volatility may say as much about the growing appetite for financial risk-taking as it does about expectations of the future volatility of oil prices.
After reviewing the main ideas in mathematical finance, this graduate textbook examine the calibration and the dynamics of the implied volatility, which is the value of the volatility that, when put in the Black-Scholes formula, reproduces the market price for a European call option.
In 1993, the Chicago Board Options Exchange (CBOE) was the first exchange to introduce an implied volatility index, called the VIX.