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S&P 100 Index Option Volatility
Campbell R. Harvey and Robert E. Whaley
The Journal of Finance
Vol. 46, No. 4 (Sep., 1991), pp. 1551-1561
Stable URL: http://www.jstor.org/stable/2328872
Page Count: 11
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Using transaction data on the S&P 100 index options, we study the effect of valuation simplifications that are commonplace in previous research on the time-series properties of implied market volatility. Using an American-style algorithm that accounts for the discrete nature of the dividends on the S&P 100 index, we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level. Negative serial correlation is also induced by a bid/ask price effect if a single option is used to estimate implied volatility. In addition, we find that these same effects induce spurious (and unreasonable) negative cross-correlations between the changes in call and put implied volatility.
The Journal of Finance © 1991 American Finance Association