With the implied volatility as an important factor in

\r\nfinancial decision-making, in particular in option pricing valuation,

\r\nand also the given fact that the pricing biases of Leland option pricing

\r\nmodels and the implied volatility structure for the options are related,

\r\nthis study considers examining the implied adjusted volatility smile

\r\npatterns and term structures in the S&P\/ASX 200 index options using

\r\nthe different Leland option pricing models. The examination of the

\r\nimplied adjusted volatility smiles and term structures in the

\r\nAustralian index options market covers the global financial crisis in

\r\nthe mid-2007. The implied adjusted volatility was found to escalate

\r\napproximately triple the rate prior the crisis.<\/p>\r\n","references":"[1] H. E. Leland, \"Option pricing and replication with transactions costs,\u201d\r\nThe Journal of Finance, vol. 40, no. 5, pp. 1283-1301, 1985.\r\n[2] H. E. Leland, \"Comments on \"Hedging errors with Leland's option\r\nmodel in the presence of transactions costs,\u201d Finance Research Letters,\r\nvol. 4, no. 3, pp. 200-202, 2007.\r\n[3] E. Hol and S. J. Koopman, Forecasting the variability of stock index\r\nreturns with stochastic volatility models and implied volatility,\r\nTinbergen Institute Discussion Papers No. 00-104\/4, 2000.\r\n[4] H. A. Latan\u00e9 and R. J. Jr. Rendleman, \"Standard deviations of stock\r\nprice ratios implied in option prices,\u201d The Journal of Finance, vol. 31,\r\nno. 2, pp. 369-381, 1976.\r\n[5] D. P. Chiras and S. Manaster, \"The informational content of prices and a\r\ntest of market efficiency,\u201d Journal of Financial Economics, vol. 6, no. 2-\r\n3, pp. 213-234, 1978.\r\n[6] B. J. Christensen and N. R. Prabhala, \"The relation between implied and\r\nrealized volatility,\u201d Journal of Financial Economics, vol. 50, no. 2, pp.\r\n125-150, 1998.\r\n[7] J. Fleming, \"The quality of market volatility forecasts implied by S&P\r\n100 index option prices,\u201d Journal of Empirical Finance, vol. 5, no. 4,\r\npp. 317-345, 1998.\r\n[8] A. Szakmary, E. Ors, J. K. Kim and W. N. Davidson, \"The predictive\r\npower of implied volatility: evidence from 35 futures markets,\u201d Journal\r\nof Banking and Finance, vol. 27, no. 11, pp. 2151-2175, 2003.\r\n[9] S. Li and Q.Yang, \"The relationship between implied and realized\r\nvolatility: evidence from the Australian stock index option market,\u201d\r\nReview of Quantitative Finance and Accounting, vol. 32, no. 4,pp. 405-\r\n419, 2009.\r\n[10] S. Goncalves and M. Guidolin, \"Predictable dynamics in the S&P 500\r\nindex options implied volatility surface,\u201d The Journal of Business, vol.\r\n79, no. 3, pp. 1591-1635, 2006.\r\n[11] M. Wallmeier, Smile in Motion: An Intraday Analysis of Asymmetric\r\nImplied Volatility. Retrieved from SSRN 2022261:\r\nhttp:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=2022261, 2012.\r\n[12] M. Engstr\u00f6m, \"Do Swedes smile? On implied volatility\r\nfunctions,\u201dJournal of Multinational Financial Management, vol. 12, no.\r\n4-5, pp. 285-304, 2002.\r\n[13] K. Shastri and K. Wethyavivorn, \"The valuation of currency options for\r\nalternate stochastic processes,\u201d Journal of Financial Research, vol. 10,\r\nno. 4, pp. 283-293, 1987.\r\n[14] X. Xu and S. J. Taylor, \"The term structure of volatility implied by\r\nforeign exchange options,\u201d Journal of Financial and Quantitative\r\nAnalysis, vol. 29, pp. 57-74, 1994.\r\n[15] A. M. Sheikh, \"Transaction data tests of S&P 100 call option\r\npricing,\u201dThe Journal of Financial and Quantitative Analysis, vol. 26, no.\r\n4, pp. 459-475, 1991.\r\n[16] R. Heynen, \"An empirical investigation of observed smile patterns,\u201d\r\nReview of Futures Markets,vol. 13, pp. 317-353, 1993.\r\n[17] C. J. Corrado and T. Su, \"Implied volatility skews and stock return\r\nskewness and kurtosis implied by stock option prices,\u201dThe European\r\nJournal of Finance, vol. 3, no. 1, pp. 73-85, 1997.\r\n[18] B. Dumas, J. Fleming and R. E. Whaley, \"Implied volatility functions:\r\nempirical tests,\u201d The Journal of Finance, vol. 53, no. 6, pp. 2059-2016,\r\n1998.\r\n[19] P. Dennis and S. Mayhew, \"Risk-neutral skewness: evidence from stock\r\noptions,\u201d Journal of Financial and Quantitative Analysis, vol. 37. no. 3,\r\npp. 471-493, 2002.\r\n[20] J. L. Duque and P. T. Lopes, \"Maturity and volatiliy effects on UK\r\nsmiles or dying smiling,\u201d Portuguese Economic Journal, vol. 2, no. 3,\r\npp. 173-193, 2003.\r\n[21] Q. Yang, An empirical study of implied volatility in Australian index\r\noption markets. Queensland University of Technology, Queensland,\r\n2006, unpublished dissertation,\r\n[22] C. A. Brown, \"The volatility structure implied by options on the SPI\r\nfutures contract,\u201d Australian Journal of Management, vol. 24, no. 2, pp.\r\n115-130, 1999.\r\n[23] C. A. Brown and S. Pinder,\"The Impact of net buying pressure on\r\nimplied volatilities observed from SPI futures options,\u201d Review of\r\nFutures Markets, vol. 14, no. 2, pp. 199-216, 2005\r\n[24] G. Bakshi, N. Kapadia, and D. Madan, \"Stock return characteristics,\r\nskew laws, and the differential pricing of individual equity options,\u201d\r\nReview of Financial Studies, vol. 16, no. 1, pp. 101-143, 2003.\r\n[25] I. Pe\u00f1a, G. Rubio and G. Serna, \"Why do we smile? On the determinants\r\nof the implied volatility function,\u201d Journal of Banking and Finance, vol.\r\n23, n0. 8, pp. 1151-1179, 1999.\r\n[26] G. Gemmill and N. Kamiyama, \"International transmission of option\r\nvolatility and skewness: when you're smiling does the whole world\r\nsmile?\u201d2000, City University Cass Business School Working paper.\r\n[27] B. Dumas, J. Fleming and R. Whaley, Implied Volatility Functions:\r\nEmpirical Tests. 1996, CEPR Discussion Paper, 1369.\r\n[28] N. P. B. Bollen and R. E. Whaley, \"Does net buying pressure affect the\r\nshape of implied volatility functions?\u201dThe Journal of Finance, vol. 59,\r\nno. 2, pp. 711-753, 2004.\r\n[29] J. C. Jackwerth and M. Rubinstein, \"Recovering probability distributions\r\nfrom option prices,\u201d The Journal of Finance, vol. 51, no, 5, pp. 1611-\r\n1631, 1996.\r\n[30] S. Sehgal and N. Vijayakumar, \"Determinants of implied volatility\r\nfunction on the nifty index options market: Evidence from India,\u201d Asian\r\nAcademy Of Management Journal Of Accounting And Finance, vol. 4,\r\npp. 45-69, 2008.\r\n[31] A. Ng, \"Volatility Spillover Effects from Japan and the US to the\r\nPacific-Basin,\u201d Journal of International Money and Finance, vol. 19,\r\npp. 207-233, 2000.\r\n[32] R. Cont and J. D. Fonseca, \"Dynamics of Implied Volatility Surfaces\u201d,\r\nQuantitative Finance, 2, vol. 2, pp. 40-56, 2002.\r\n[33] J. Zheng and D. Xie, \"Stochastic modeling and estimation of market\r\nvolatilities with applications in financial forecasting,\u201d International\r\nJournal of Statistics and Probability, vol. 1, no. 1, pp. 7, 2012.\r\n[34] T. Daglish, J. Hull and W. Suo, \"Volatility surfaces: theory, rules of\r\nthumb, and empirical evidence,\u201d Quantitative Finance, vol. 7, no. 5, pp.\r\n507-524, 2007.\r\n[35] Mimi Hafizah, A. Leland option pricing models and transaction costs: an\r\nempirical study. University of South Australia, South Australia, 2011,\r\nunpublished doctoral dissertation,\r\n[36] A. Bernales and M. Guidolin, \"Can We Forecast the Implied Volatility\r\nSurface Dynamics for CBOE Equity Options?\u201d Predictability and\r\nEconomic Value Tests (456), 2010.\r\n[37] G. Chalamandaris and A. E. Tsekrekos, \"How important is the term\r\nstructure in implied volatility surface modeling? Evidence from foreign\r\nexchange option,\u201dJournal of International Money and Finance, vol. 30,\r\nno. 4, pp. 623-640, 2011.\r\n[38] F. Black and M. Scholes, \"The valuation of option contracts and a test of\r\nmarket efficiency\u201d, TheJournal of Finance, vol. 27, no. 2, pp. 399-417,\r\n1972.\r\n[39] R. C. Merton, \"Theory of rational option pricing,\u201d The Bell Journal of\r\nEconomics and Management Science, vol. 4, no. 1, pp. 141-183, 1973.\r\n[40] S. Li and Mimi Hafizah, Abdullah. (2012). Implied transaction costs by\r\nLeland option pricing model: A new approach and empirical evidence.\r\nJournal of Derivatives & Hedge Funds, vol. 18, no. 4, pp. 333-360,\r\n2012.\r\n[41] G. Bakshi, C. Cao and Z. Chen, \"Empirical performance of alternative\r\noption pricing models\u201d, The Journal of Finance, vol. 52, no. 5, pp. 2003-\r\n2049. 1997.\r\n[42] T. Sharp, S. Li and D. Allen, \"Empirical performance of affine option\r\npricing models: evidence from the Australian index options market,\u201d\r\nApplied Financial Economics, vol. 20, no. 6, pp. 501-514, 2010.\r\n","publisher":"World Academy of Science, Engineering and Technology","index":"Open Science Index 92, 2014"}