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Volatility smiles when information is lagged in prices

Marcato, G., Sebehela, T. and Campani, C. H. (2018) Volatility smiles when information is lagged in prices. North American Journal of Economics and Finance, 46. pp. 151-165. ISSN 1062-9408

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To link to this item DOI: 10.1016/j.najef.2018.03.004

Abstract/Summary

This study explores volatility smiles when stock market information is lagged, specifically in the REIT industry. A usual requirement is that REITs can only disseminate information relating to their property valuations once per year; therefore, this leads to the lagging effect. Within the context of exchange options (i.e. mergers), it seems that no study has researched on this theme. This article uses the Black & Scholes model to calculate implied volatilities and their corresponding implied options to illustrate arbitrage opportunities when exchange options emerge. The results illustrate that implied volatilities are different from non-implied volatilities. Further, arbitrage is still higher among REITs as opposed to other capital market instruments. Finally, just like other capital market instruments, REIT acquisitions generate alpha.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > Real Estate and Planning
Henley Business School > ICMA Centre
ID Code:76287
Uncontrolled Keywords:Exchange option, lagged and volatility smile
Publisher:Elsevier

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