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

Authors

  • Joseph Cheng Graziadio School of Business, Pepperdine University
  • Jack Hui Lingnan University

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.

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Published

2019-06-30

How to Cite

Cheng, Joseph, and Jack Hui. 2019. “How Close Is the Implied Volatility Derived from Black Scholes for Individual Stocks to VIX”. Journal of Finance Issues 18 (1):41-51. https://jfi.aof-mbaa.org/index.php/jfi/article/view/2220.

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Section

Original Article