Implied Volatility in Option Prices and the Lead-Lag Relation between Stock and Option Prices

OFOR Working Paper Number 94-01

Posted: 20 Dec 1998

See all articles by Hun Y. Park

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Abstract

We show that if a particular lead-lag relation exists between the option and stock markets, the implied volatility in option prices can be biased depending on the level of the true volatility. The higher the true volatility, the more upward (downward) biased the implied volatility will be, if the option market leads (lags) the stock market. We present some empirical results on the intraday implied volatility in option prices as an application or evidence of the theory.

JEL Classification: 12

Suggested Citation

Park, Hun Y. and Boyle, Phelim P., Implied Volatility in Option Prices and the Lead-Lag Relation between Stock and Option Prices. OFOR Working Paper Number 94-01, Available at SSRN: https://ssrn.com/abstract=5498

Hun Y. Park

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Urbana, IL 61820
United States
217-333-0659 (Phone)
217-244-3102 (Fax)

Phelim P. Boyle (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

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