An Improved Approach to Computing Implied Volatility

Posted: 8 Nov 2002

See all articles by Donald R. Chambers

Donald R. Chambers

Chartered Alternative Investment Analyst Association (CAIA)

Sanjay K. Nawalkha

University of Massachusetts Amherst - Isenberg School of Management

Abstract

A well-known problem in finance is the absence of a closed form solution for volatility in common option pricing models. Several approaches have been developed to provide closed form approximations to volatility. This paper examines Chance's (1993, 1996) model, Corrado and Miller's (1996) model and Bharadia, Christofides and Salkin's (1996) model for approximating implied volatility. We develop a simplified extension of Chance's model that has greater accuracy than previous models. Our tests indicate dramatically improved results.

Suggested Citation

Chambers, Donald R. and Nawalkha, Sanjay K., An Improved Approach to Computing Implied Volatility. Available at SSRN: https://ssrn.com/abstract=311268

Donald R. Chambers (Contact Author)

Chartered Alternative Investment Analyst Association (CAIA) ( email )

100 University Drive
Amherst, MA 01002
United States

Sanjay K. Nawalkha (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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