RDP 8902: Option Prices and Implied Volatilities: An Empirical Analysis 6. Conclusions

The paper claims to have detected a tendency for both financial futures options and currency options to overpredict subsequent changes in the variance of the underlying prices. In currency options, the results also imply a consistent overstatement of the level of volatility, though this has tended to narrow steadily through the sample period. These anomalies were statistically significant in all the cases tested, but we recognise that the unusual circumstances surrounding recent share price movements make the results for SPI options difficult to interpret. For the remainder, however, the results clearly violate the joint hypothesis of Black-Scholes pricing and forecast efficiency. The fact that apparent pricing biases are not correlated with option deltas, and give rise to within-sample excess returns, points to forecast inefficiencies as an important element in explaining these results.