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  • 2019 Spring: Volume 18, Issue 1
  • How Close is the Implied Volatility Derived from Black Scholes for Individual Stocks to VIX

    • Joseph Cheng ;
    • Jack Hui

    Title:

    How Close is the Implied Volatility Derived from Black Scholes for Individual Stocks to VIX

    Author(s):

    Joseph Cheng and Jack Hui

    Publication Date:

    2019

    Journal Title:

    The Journal of Finance Issues

    Volume Number:

    18

    Issue Number:

    1

    Abstract:

    The implied volatility derived from Black Scholes model represents total volatility which includes both systematic and unsystematic components. The purpose of this paper is to examine the accuracy of the implied volatility derived by Black Scholes (after excluding the unsystematic component) with reference to VIX, which is a widely used proxy for market (systematic) volatility. We utilize CAPM to extract the volatility linked to systematic component for the 30 individual stocks within Dow Jones and compare them to VIX. The systematic volatility for these stocks adjusted for beta turn out to be rather close to the VIX, which implied that CAPM is an effective approach for separating market risk from total risk.

    First Page:

    41

    Last Page:

    51

    Total Pages:

    11