## Abstract

We numerically solve systems of Black-Scholes formulas for implied volatility and implied risk-free rate of return. After using a seemingly unrelated regressions (SUR) model to obtain point estimates for implied volatility and implied risk-free rate, the options are re-priced using these parameters. After repricing, the difference between the market price and model price is increasing in time to expiration, while the effect of moneyness and the bid-ask spread are ambiguous. Our varying risk-free rate model yields Black-Scholes prices closer to market prices than the fixed risk-free rate model. In addition, our model is better for predicting future evolutions in model-free implied volatility as measured by the VIX.

Original language | English (US) |
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Pages (from-to) | 1-26 |

Number of pages | 26 |

Journal | North American Journal of Economics and Finance |

Volume | 31 |

DOIs | |

State | Published - Jan 1 2015 |

Externally published | Yes |

## Keywords

- Forecasting volatility
- Implied volatility
- Re-pricing options
- Seemingly unrelated regression

## ASJC Scopus subject areas

- Finance
- Economics and Econometrics