Title page for ETD etd-11122008-110301

Type of Document Dissertation
Author Hilliard, Jitka
Author's Email Address jhillia@lsu.edu
URN etd-11122008-110301
Title Three Essays in Option Pricing: 1. Volatilities Implied by Price Changes in the S&P 500 Options and Futures Contracts 2. Price Changes in the S&P 500 Options and Futures Contracts: A Regression Analysis 3. Hedging Price Changes in the S&P 500 Options and Futures Contracts: The Effect of Different Measures of Implied Volatility
Degree Doctor of Philosophy (Ph.D.)
Department Finance (Business Administration)
Advisory Committee
Advisor Name Title
Wei Li Committee Chair
Carlos V. Slawson Committee Member
Eric T. Hillebrand Committee Member
Ji-Chai Lin Committee Member
Jacquelyn Sue Moffitt Dean's Representative
  • S&P 500 futures
  • implied price change volatility
  • Implied volatility
  • hedging
  • option pricing
Date of Defense 2008-11-07
Availability unrestricted
In this work, I develop a new volatility measure; the volatility implied by price changes in option contracts and their underlyings. I refer to this as implied price change volatility. First, I examine the time series behavior of implied price change volatility and investigate possible moneyness and maturity effects. I compare these characteristics to those of the usual implied volatility measure and the historical volatility of the S&P 500 index. Then, I investigate the performance of the implied price change volatility in a regression setup and in hedging applications. I compare the performance of hedges using daily updated implied price change volatility and implied volatility and their averages. Data used in this study are tick-data on pit traded S&P 500 futures options and their underlying from 1998 to 2006.

I find that implied price change volatility has similar time series behavior and moneyness and maturity effects as implied volatility. However, the price change volatility is more disperse than implied volatility. Hedges using daily updated volatilities consistently outperform hedges based on average volatilities. In addition, the delta hedges based on directly estimated implied price change volatility outperform even the delta-gamma and delta-vega hedges for call options. This finding suggests that using volatilities estimated from price changes rather than price levels may result in more effective hedges for call options.

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