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Financial Market Dissertations

C/F/144. Dissertation + Proposal. Implied Volatility Trees: the Case of S&P 500

WORDS:

15000

DATE:

2006

PRICE:

159.99 GBP

The main aim of this dissertation is to show how implied volatility trees can be used to extract implied volatility from the data on options. This topic has become particularly important ever since the market crash of 1987 when the views of market participants became more pessimistic leading to the increased probability of negative returns. The author develops a unified notation and graphical representation in order to pin-point advantages and drawbacks of different models. The empirical part is dedicated to building a binomial volatility tree based on options on futures on the S&P500. The results show that, indeed, the implied distribution has fatter left tails than the identical lognormal distribution. Therefore, one can expect more likely negative returns if the real data are used. This confirms the conclusions of previous studies. This work will be interesting to all those people studying the fascinating world of derivatives and implied volatility models.

KEYWORDS: Implied Volatility, Black-Scholes, Deterministic Volatility Trees, Stochastic Volatili,