The Implied Volatility of Option Prices: A Test Using Options on UK Stocks

University of Lancaster Working Paper No. 95/004

Posted: 10 Oct 1998

See all articles by Laurence Copeland

Laurence Copeland

Cardiff University - Cardiff Business School

Ser-Huang Poon

Alliance Manchester Business School, University of Manchester; Alan Turing Institute

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance

Date Written: May 1995

Abstract

This paper presents and tests a model of the volatility of individual company stocks derived from option prices. The data comes from 63 traded options quoted on the London International Financial Futures Exchange. The model relates volatilities to earnings announcement dates, interest rate volatility and to accounting variables representing leverage, the degree of fixed rate debt, asset duration and earnings inflation indexation. The model predicts that volatility is positively related to duration and leverage and negatively related to both the degree of inflation indexation and the proportion of fixed rate debt in the capital structure. Empirical results suggest that duration and inflation indexation are significant determinants of the implied volatility. Time series test also show an expected drop in volatility after the earnings announcement date and in most cases a positive relationship between the implied volatility of the stock and the volatility of interest rates.

JEL Classification: G14, G39

Suggested Citation

Copeland, Laurence S. and Poon, Ser-Huang and Stapleton, Richard C., The Implied Volatility of Option Prices: A Test Using Options on UK Stocks (May 1995 ). University of Lancaster Working Paper No. 95/004, Available at SSRN: https://ssrn.com/abstract=6434

Laurence S. Copeland

Cardiff University - Cardiff Business School ( email )

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Ser-Huang Poon (Contact Author)

Alliance Manchester Business School, University of Manchester ( email )

Alliance Manchester Business School
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Manchester, Manchester M15 6PB
United Kingdom
+44 161 275 4031 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.manchester.ac.uk/research/Ser-huang.poon/

Alan Turing Institute ( email )

British Library, 96 Euston Road
London, NW12DB
United Kingdom

Richard C. Stapleton

University of Strathclyde - Department of Accounting and Finance ( email )

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Glasgow G4 0LN
United Kingdom
+44 1524 381 172 (Phone)
+44 1524 846874 (Fax)

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