02221cam a22002777 4500001000600000003000500006005001700011008004100028100002000069245012400089260006600213490004100279500001600320520100300336530006101339538007201400538003601472690011201508690009101620700001901711700002201730710004201752830007601794856003701870856003601907w5500NBER20170623171151.0170623s1996 mau||||fs|||| 000 0 eng d1 aDumas, Bernard.10aImplied Volatility Functionsh[electronic resource]:bEmpirical Tests /cBernard Dumas, Jeff Fleming, Robert E. Whaley. aCambridge, Mass.bNational Bureau of Economic Researchc1996.1 aNBER working paper seriesvno. w5500 aMarch 1996.3 aBlack and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S&P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class. 7aG13 - Contingent Pricing • Futures Pricing2Journal of Economic Literature class.1 aFleming, Jeff.1 aWhaley, Robert E.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w5500.4 uhttp://www.nber.org/papers/w550041uhttp://dx.doi.org/10.3386/w5500