Volatility smiles when information is lagged in prices

Abstract

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.

The (De)merits of using Integral Transforms in Predicting Structural Break Points

“…For calculation purposes, they assume that an iteration process would solve every challenge including optimisation of the points of structural breaks. However, Marcato et al (2018) show that the iteration process does not necessarily account for every single point of every used parameter. Thus by extension, there is always some error involved when running iteration processes.…”