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Alternative Methods to Estimate Implied Variance: Review and Comparison

Author

Listed:
  • Yibing Chen

    (National Council for Social Security Fund, China)

  • Cheng-Few Lee

    (Department of Finance and Economics, Rutgers University, USA)

  • John Lee

    (Center for PBBEF Research, USA)

  • Jow-Ran Chang

    (Department of Quantitative Finance, National Tsing Hua University, Taiwan)

Abstract

In this paper, we first review several alternative methods to estimate implied variance. Then we show how the MATLAB computer program can be used to estimate implied variance based upon the Black–Scholes model. In addition, we also discuss how the approximation method derived by Ang et al. (2013) can be used to estimate implied variance. Real-world data from US individual stock options are used to compare the estimation results using three typical alternative methods: regression method proposed by Lai et al., MATLAB computer program approach and approximation method derived by Ang et al. Also, this paper presents the empirical results of China ETF 50 options which were new in the financial markets.

Suggested Citation

  • Yibing Chen & Cheng-Few Lee & John Lee & Jow-Ran Chang, 2018. "Alternative Methods to Estimate Implied Variance: Review and Comparison," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-28, December.
    • Handle: RePEc:wsi:rpbfmp:v:21:y:2018:i:04:n:s021909151850025x
    DOI: 10.1142/S021909151850025X
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    References listed on IDEAS

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