Djikas, Evan T.

Jaggi, Faculty Advisor, Narendra K.

Digital Commons @ Illinois Wesleyan University

Illinois Wesleyan UniversityDigital Commons @ IWUJohn Wesley Powell Student ResearchConference 1999, 10th Annual JWP ConferenceApr 17th, 10:30 AM - 12:00 PMHow Acute are Today's Stock Market Investors?Tracking Conventional Wisdom through ImpliedVolatilityEvan T. DjikasIllinois Wesleyan UniversityNarendra K. Jaggi, Faculty AdvisorIllinois Wesleyan UniversityFollow this and additional works at: http://digitalcommons.iwu.edu/jwprcThis Event is brought to you for free and open access by The Ames Library, the Andrew W. Mellon Center for Curricular and FacultyDevelopment, the Office of the Provost and the Office of the President. It has been accepted for inclusion in Digital Commons @ IWU bythe faculty at Illinois Wesleyan University. For more information, please contact digitalcommons@iwu.edu.©Copyright is owned by the author of this document.Evan T. Djikas and Narendra K. Jaggi, Faculty Advisor, "How Acute are Today's Stock Market Investors? TrackingConventional Wisdom through Implied Volatility" (April 17, 1999). John Wesley Powell Student Research Conference.Paper 2.http://digitalcommons.iwu.edu/jwprc/1999/oralpres/2THE JOHN WESLEY POWELL STUDENT RESEARCH CONFERENCE " APRIL 1999 Oral Presentation 1 .4 HOW ACUTE ARE TODAY'S STOCK MARKET INVESTORS? TRACKING CONVENTIONAL WISDOM THROUGH IMPLIED VOLATILITY. Evan T. Djikas and Narendra K. Jaggi* Department of Physics, Illinois Wesleyan University In 1 973, Fischer Black and Myron Scholesl, and Robert Merton2 developed a novel, deterministic algorithm, which could, given a realistic set of assumptions about the volatility of the market, compute the rational price of European call options. This pioneering work placed options-pricing on a rational footing, and was recently ( 1997) honored by awarding the Nobel prize in Economics. We have inverted this algorithm to impute, by iteration, the implied volatility _ of the underlying stock3 and infer market opinion of future price movements. We have tracked options on stocks under heavy speculation to discern the investor sentiment surrounding these stocks, by extracting the implied volatility of the stock price. Issues surrounding the accuracy of investor sentiment on these stocks will be addressed. IF. Black and M. Scholes, "The pricing of options and corporate liabilities", Journal of Political Economy, vol 8 1  ( 1973) 637-654 2R. Merton, "Theory of rational option pricing", Bell Journal of Economics and Management Science, vol. 4 ( 1973) 141 - 183 3 P. Wilmott, S .  Howison and J. Dewynne, " The Mathematics of Financial Derivatives", Cambridge University Press ( 1995). This is a comprehensive introduction to the underlying mathematics. 

How Acute are Today\u27s Stock Market Investors?  Tracking Conventional Wisdom through Implied Volatility

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How Acute are Today\u27s Stock Market Investors? Tracking Conventional Wisdom through Implied Volatility

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