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Volatility Implied by Option Prices: The Case of Takeover Bids
Author(s) -
Acker Daniella,
Attfield Cliff
Publication year - 2000
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00330
Subject(s) - moneyness , predictive power , volatility (finance) , economics , econometrics , jump , financial economics , monetary economics , philosophy , physics , epistemology , quantum mechanics
We model the effect of an impending share price jump on the implied standard deviation (ISD) of a company’s options, testing the model by investigating its predictive ability for ISDs of companies subject to a takeover bid. Our model fits the observed ISDs well for all but certain deep in‐the‐money options. However, the model demonstrates that a discontinuity in the relationship between moneyness and the ISD both explains the combination of high and zero ISDs exhibited by these options, and impairs the predictive power of the model at these levels of moneyness.