Schroeder, Gerhard (2009): Volatility Indexes seem to point to the Past.
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In theory, by trading options, market participants asses and set future volatilities that can be identified using the Black-Scholes-formula in reverse. In reality, as regression analysis suggests, it is historical market data which instead are used to determine future values. Further analysis shows that historical volatilities are insufficient predictors. Yet this questionable practice is considered by international accounting standards (IAS/IFRS) to allow "historical data and implied volatilities" for "reasonable estimations". In a kind of short-circuit, historical volatilities are introduced into option trading and returned as implied volatilities. In reality, both differ significantly from future values. Comparing the volatility of the past nine weeks with that of the following nine weeks, estimation error ranges from four to over ten percentage points.
(No paper found in the net challenging the implied hypothesis of IAS 39/AG82(f))
|Item Type:||MPRA Paper|
|Original Title:||Volatility Indexes seem to point to the Past|
|English Title:||Volatility Indexes seem to point to the Past|
|Keywords:||Volatility; Prediction; EU Accounting Standards; IAS; Correlation; GARCH; Derivatives;|
|Subjects:||F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications
B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B23 - Econometrics; Quantitative and Mathematical Studies
H - Public Economics > H8 - Miscellaneous Issues > H83 - Public Administration; Public Sector Accounting and Audits
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General
|Depositing User:||Gerhard Schroeder|
|Date Deposited:||20. Oct 2009 19:37|
|Last Modified:||13. Feb 2013 11:19|
Black, Fisher / Scholes, Myron: "The Valuation of Option Contracts and a Test of Market Efficiency“, (1972) Journal of Finance, 27, S. 399-417
Black, Fisher / Scholes, Myron: „The Pricing of Options and Corporate Liabilities“, (1973) Journal of Political Economy 81 (3), S. 637-654
Engle, R. F., V.K. Ng: „Measuring and Testing the Impact of News on Volatility“ (1993) Journal of Finance 48, S. 1749-1778
Fahrmeir, Ludwig et al.: "Statistik", 3. Ed., Berlin, Heidelberg, (1997-2001) (lag correlation = „verschiebliche Korrelation“, assuming Y = a + b * (x + t) with t = time lag)
Hull, J. C.: „Options, Futures and Other Derivates“, 3rd edition, Prentice Hall, (1997)
Pape, Ulrich / Merk, Andreas: "Zur Angemessenheit von Optionspreisen - Ergebnisse einer empirischen Überprüfung des Black/Scholes-Modells" ESCP-EAP-Workingpaper, (2003), P. 8 and 14 ff.
The IASC Foundation in Delaware and London maintains © of all IAS and IFRS publications including the ones confirmed as mandatory EU-Accounting Standards.
There are well documented Nobel Prize pages covering B&S and GARCH in the Web.
Historical Critics regarding the "B&S"-Formula (by years - a selection)
Galai, D.: „A Survey of Empirical Tests of Option-Pricing-Models“ in Brenner, S. Menachem (Hrsg.): "Option Pricing“ (1983)
Geyer Geske, R, W. Touros (1991): „Skewness, Kurtosis and Black-Scholes Mispricing“ In: Statistical Papers, Vol. 32, S. 299-309
Anderson, Alois L. J.: ZfB 91/1 (43.Jg.) S. 65-74: „Is the random walk dead“ Chapter 2 „Failure of the Gaussian Hypothesis"
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