Abstract

http://ssrn.com/abstract=6568
 
 

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The Informational Role of Asset Prices: The Case of Implied Volatility


Zvi Bodie


Boston University - Department of Finance & Economics

Robert C. Merton


MIT Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit


Working Paper 95-063

Abstract:     
An important function of the financial system is to serve as a key source of information that helps coordinate decentralized decision-making in various sectors of the economy. Households and investors use interest rates, futures prices and security prices in making their consumption-saving decisions and portfolio allocation decisions. Interest rates and prices provide important signals to managers of firms in their selection of investment projects and financings. This paper illustrates the role played by financial markets in providing information about the future volatility-that is, the degree of uncertainty-of economic variables such as interest rates, exchange rates, commodity prices, and stock, bond and other security prices. It has two basic goals: (1) to show the importance of volatility for all sorts of policy decisions in the private and public sectors of the economy; and (2) to show how ex ante estimates of future volatility can be extracted from the prices of securities.

JEL Classification: G12, G14

working papers series





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Date posted: August 25, 1998  

Suggested Citation

Bodie, Zvi and Merton, Robert C., The Informational Role of Asset Prices: The Case of Implied Volatility. Working Paper 95-063. Available at SSRN: http://ssrn.com/abstract=6568

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
Robert C. Merton
MIT Sloan School of Management ( email )
77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6678 (Phone)
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