What Could Also Cause or Aggravate the Implicit ‘Smile’ and ‘Asymmetry’?

Applied Economics Letters, 2002 (9), 75-80

12 Pages Posted: 2 Oct 2012

Date Written: September 2, 2002

Abstract

This research note shows that the implied Black-Scholes volatility calculated using the bisection algorithm can have significant biases, which are more severe for in-themoney (ITM) options than for out-of-the-money (OTM) options. The biases are shown to have important implications as they could potentially aggravate the well-documented smile or smirk and asymmetry of implied Black-Scholes volatility for equity options. The findings caution the use of bisection algorithm for the calculation of Black-Scholes implied volatility. This research note also shows that the biases can be eliminated using the optimization algorithm which uses at least the first derivative of the objective function.

Suggested Citation

Jiang, George, What Could Also Cause or Aggravate the Implicit ‘Smile’ and ‘Asymmetry’? (September 2, 2002). Applied Economics Letters, 2002 (9), 75-80, Available at SSRN: https://ssrn.com/abstract=2155970

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

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