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    Computation of the implied discount rate and volatility for an overdefined system using stochastic optimization

    227783_144923_IMA_JMM_accepted_version.pdf (342.3Kb)
    Access Status
    Open access
    Authors
    Hin, L.
    Dokuchaev, Nikolai
    Date
    2015
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Hin, L. and Dokuchaev, N. 2015. Computation of the implied discount rate and volatility for an overdefined system using stochastic optimization. IMA Journal of Management Mathematics. 27 (4): pp. 505-527.
    Source Title
    IMA Journal of Management Mathematics
    DOI
    10.1093/imaman/dpv007
    ISSN
    1471-678X
    School
    Department of Mathematics and Statistics
    Remarks

    This is a pre-copyedited, author-produced PDF of an article accepted for publication in IMA Journal of Management Mathematics following peer review. The version of record "Hin, L. and Dokuchaev, N. 2015. Computation of the implied discount rate and volatility for an overdefined system using stochastic optimization. IMA Journal of Management Mathematics" is available online at http://doi.org/10.1093/imaman/dpv007

    URI
    http://hdl.handle.net/20.500.11937/45001
    Collection
    • Curtin Research Publications
    Abstract

    This paper studies estimation of the implied volatility and the impact of the choice of the corresponding risk-free rate proxy. We suggest to analyse the implied volatility and the risk-free rate proxy inferred in conjunction with the observed option prices. We formulate and solve an overdefined system of non-linear equations for the Black–Scholes model using options data. More precisely, we seek an optimal approximate solution via differential evolution, a stochastic optimization technique. Some experiments with historical prices reveal a higher inferred risk-free rate than commonly used proxies. This leads to narrower volatility spread, or smaller difference between implied and realized volatilities.

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