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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… Click to show full 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
Year Published: 2019
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