Implied volatility and the risk-free rate of return in options markets

Marcelo Bianconi*, Scott MacLachlan, Marco Sammon

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

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 languageEnglish (US)
Pages (from-to)1-26
Number of pages26
JournalNorth American Journal of Economics and Finance
Volume31
DOIs
StatePublished - Jan 1 2015
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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