Errors in Implied Volatility Estimation

By Ludger Hentschel. Journal of Financial and Quantitative Analysis, 2003

195 citations recorded by the source corpus.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/179aa6bf874bf100865888131218988d273cf755

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

Cross-sectional tests of deterministic volatility functions (2002, background): “These options have very small time-premiums and their implied volatilities are inaccurate since they are very sensitive to market micro-structure problems and measurement errors (see, for example Hentschel, 2001).”
Can the evolution of implied volatility be forecasted? Evidence from European and US implied volatility indices (2008, background): “Table 8 shows the annualised Sharpe ratio (SR) and Leland’s (1999) alpha (Ap) obtained for each one of the three shortest VIX and VXD futures(7).”
The Price of Political Uncertainty: Theory and Evidence from the Option Market (2014, background): “14We avoid the deepest OTM put options, those with ∆ ≈ 0, because their implied volatilities are extremely sensitive to small measurement errors in option prices (e.g., Hentschel, 2003, Beber and Brandt, 2006, etc.).”
Nonparametric option pricing under shape restrictions (2003, unknown): “It is in fact, if anything, too conservative: see the empirical evidence in Hentschel (2001). For estimation, we use a Gaussian kernel.”
Modeling and predicting the CBOE market volatility index (2014, background): “This means that the VIX essentially offers a market-determined, forward-looking estimate of one-month stock market volatility (Hentschel, 2003).”
Earnings Guidance and Market Uncertainty (2009, unknown): “First, they are always at-the-money, which reduces measurement error due to variation in the extent to which options are in the money (e.g., Hentschel, 2003).”
Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface (2005, methodology): “We follow Hentschel (2003) and set p V ar (dPi) to one-quarter of the bid-ask spread.”
The Effect of Macroeconomic News on Beliefs and Preferences: Evidence from the Options Market (2006, unknown): “Finally, we apply the usual data filters to reduce the influence of measurement errors and market microstructure problems (see Hentschel, 2002).”
Option-Implied Risk-Neutral Distributions and Risk Aversion (2004, unknown): “Hentschel (2003) noted that implied volatilities suffer from biases if option prices are observed with such errors as finite quote precision, BID–ASK SPREADS, or nonsynchronous prices.”
Arbitrage-free smoothing of the implied volatility surface (2009, methodology): “Unfortunately, an arbitrage-free IVS is not a natural situation in practice, since it is often computed from bid and ask prices, or derived from settlement data of poor quality, see Hentschel (2003) for an exhaustive exposition of this topic. As a strategy to overcome this deficiency, one employs al”