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************************** Special Time/Date ***************************
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Seminar
Department
of Systems Engineering and Engineering Management
The Chinese




Title 
: 
Volatility Smile and the
Informational Content of Implied Volatility 



Speaker 
: 
Dr. GuanJun Wang 









Date 
: 
May 9th, 2007 (Wednesday) 



Time 
: 
10:00 a.m.  11:00 a.m. 



Venue 
: 
Room 513 


William M.W. Mong Engineering Building 


(Engineering Building Complex Phase 2) 


CUHK 




Abstract:
Numerous explanations for the volatility smile/skew phenomenon and extensions of, or alternatives to, the BlackScholes model, have been offered in the literature. The inconsistence between the alternative models and data makes it worthwhile to rethink the wellknown BlackScholes model. Though it has been conjectured that the presence of measurement error can be of substantial impact on volatility estimation, I first show rigorously the level of sensitivity of price error to the volatility estimation for the options at different strikes and maturities. My results show that the degree of the bias of the implied volatility obtained from the option market price is directly related to the option’s moneyness and maturity and such bias can be minimized using option with appropriate strike and maturity from a mathematical point of view. I conclude that observed volatility smile/skew or nonflat term structure phenomenon does not necessarily violate the lognormal return and constant volatility assumption required by the BlackScholes model in the presence of price error: price error alone can produce volatility smile/skew phenomenon even if the BlackScholes model is correct. The smile phenomenon makes it unclear which implied volatility provides the best measure of the market volatility expectation over the remaining life of the options. Due to its liquidity and less sensitivity to price error, atthemoney implied volatility is often considered as a good measure of future volatility. In the second part of this paper, I empirically test the predictive power of the implied volatility from options with highest vega in comparison to that of atthemoney implied volatility. My empirical results are consistent with my conjecture that implied volatility from option with highest vega is more likely an efficient and less biased forecast of future volatility and has more predictive power than atthemoney implied volatility; the advantage of using highest vega implied volatility as future volatility estimate increases as forecasting horizon increases. Key Words: options, BlackScholes
Model, implied volatility, volatility smile/skew, term structure, inversion,
predictive power 

Biography:
GuanJun Wang received her B.S.
in mathematics from 
************************* ALL ARE WELCOME ************************



Host 
: 
Prof. Duan Li 
Tel 
: 
(852) 26098316, 26098323 
Email 
: 
dli@se.cuhk.edu.hk 



Enquiries 
: 
Bolin Ding or Jeffrey Xu Yu 

: 
Department of Systems Engineering and Engineering
Management 


CUHK 
Website 
: 
http://www.se.cuhk.edu.hk/~seg5810 
Email 
: 
seg5810@se.cuhk.edu.hk 



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