Implied volatility functions: empirical tests

Article Abstract:

Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function (DVF) option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black-Scholes (1973) implied volatilities across exercise prices and times to expiration. (Reprinted by permission of the publisher.)

Return on investment, Assets (Accounting), Rate of return

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Efficient analytic approximation of American option values

Article Abstract:

This paper provides simple, analytic approximations for pricing exchange-traded American call and put options written on commodities and commodity futures contracts. These approximations are accurate and considerably more computationally efficient than finite-difference, binomial, or compound-option pricing methods. (Reprinted by permission of the publisher.)

Prices and rates, Commodity options

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