Journal of Finance, 46 (1991): 1551-1561
Campbell R. Harvey
Robert E. Whaley
Using transaction data on the S&P 100 index options, we study the effect of valuation simplifications that are commonplace in previous research on the timeseries properties of implied market volatility. Using an American-style algorithm that accounts for the discrete nature of the dividends on the S&P 100 index, we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and. the index level. Negative serial correlation is also induced by a bid/ask price effect if a single option is used to estimate implied volatility. In addition, we find that these mine effects induce spurious (and unreasonable) negative cross-correlations between the changes in call and put implied volatility.