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The information frown in option prices.
Document Type
Article
Publication Date
2005
ISSN
0378-4266
Abstract
In the S&P 500 options market, the information content of implied volatilities differs by strike in a frown pattern that is a rough mirror image of the implied volatility smile. Implied volatilities calculated from moderately high strike price options are both unbiased and efficient predictors of future volatility. Implied volatilities calculated from low and at-the-money strikes are biased and less efficient. This bias cannot be explained by market imperfections but is consistent with the hedging pressure argument of Bollen and Whaley [J. Finan. 59 (2004) 711] and Ederington and Guan [J. Derivat. 10 (2002) (Winter) 9]. We also find that a serious estimation bias results when the relations are estimated using panel data.
Language
en_US
Publisher
Elsevier
Recommended Citation
Ederington, L.H. & Guan, W. (2005). The information frown in option prices. Journal of Banking & Finance, 29(6), 1429-1457.
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.
Comments
Abstract only. Full-text article is available through licensed access provided by the publisher. Published in Journal of Banking & Finance, 29(6), 1429-1457. DOI: 10.1016/j.jbankfin.2004.05.037. Members of the USF System may access the full-text of the article through the authenticated link provided.