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Determining the Implied Volatility for American Options Using the QAM

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  • Kutner, George W

Abstract

This paper describes an efficient numerical procedure which may be used to determine implied volatilities for American options using the quadratic approximation method. Simulation results are presented. The procedure usually converges in five or six iterations with extreme accuracy under a wide variety of option market conditions. A comparison of American implied volatilities with European model implied volatilities indicates that significant differences may arise. This suggests that reliance on European model volatilities estimates may lead to significant pricing errors. Copyright 1998 by MIT Press.

Suggested Citation

  • Kutner, George W, 1998. "Determining the Implied Volatility for American Options Using the QAM," The Financial Review, Eastern Finance Association, vol. 33(1), pages 119-130, February.
    • Handle: RePEc:bla:finrev:v:33:y:1998:i:1:p:119-30
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    Cited by:

    1. George W. Kutner & David C. Porter & John G. Thatcher, 2001. "The Proposed Introduction Of Futures-Style Margining In The United States: An Australian Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(2), pages 239-259, June.
    2. Nikitopoulos, Christina Sklibosios & Squires, Matthew & Thorp, Susan & Yeung, Danny, 2017. "Determinants of the crude oil futures curve: Inventory, consumption and volatility," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 53-67.

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