Consequences for Option Pricing of a Long Memory in Volatility

56 Pages Posted: 13 May 2001

See all articles by Stephen J. Taylor

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

Date Written: December 2000

Abstract

The economic consequences of a long memory assumption about volatility are documented, by comparing implied volatilities for option prices obtained from short and long memory volatility processes. Numerical results are given for options on the S & P 100 index from 1984 to 1998, with lives up to two years. The long memory assumption is found to have a significant impact upon the term structure of implied volatilities and a relatively minor impact upon smile effects. These conclusions are important because evidence for long memory in volatility has been found in the prices of many assets.

Suggested Citation

Taylor, Stephen J., Consequences for Option Pricing of a Long Memory in Volatility (December 2000). Available at SSRN: https://ssrn.com/abstract=269840 or http://dx.doi.org/10.2139/ssrn.269840

Stephen J. Taylor (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/afasjt

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