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Time Varying Volatilities and Calculation of the Weighted Implied Standard Deviation

Published online by Cambridge University Press:  06 April 2009

Bruce G. Resnick ,
Aamir M. Sheikh  and
Yo-Shin Song
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Abstract

Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devising an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basically similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of expiration-specific WISDs, as opposed to standard composite WISDs, results in improved performance of option pricing models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 3 , September 1993 , pp. 417 - 430
Copyright
Copyright © School of Business Administration, University of Washington 1993

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