Implied volatility and investor beliefs in experimental asset markets
Department
Economics, Finance and Quantitative Analysis
Document Type
Article
Publication Date
3-1-2019
Abstract
Investor expectations move markets so the ability to measure beliefs is critical for market participants. Though the volatility implied by traded option prices is a popular gauge of beliefs, our understanding of its usefulness is incomplete. Our experimental markets feature a stock and a call option. The stock has two possible outcomes and the distance between the outcomes is our measure of volatility. The outcome range is not always announced. Regardless of whether it is announced and despite observed mispricing of the two assets, knowledge of the range implied by trading prices informs observers about subjects' beliefs concerning volatility.
Journal Title
Journal of Financial Markets
Journal ISSN
1386-4181
Volume
43
First Page
121
Last Page
136
Digital Object Identifier (DOI)
10.1016/j.finmar.2019.02.001