New method predicts stock price volatility for more accurate options pricing.
The concept of implied integrated volatility is introduced in this thesis, which is a key factor in option theory. It is a stochastic extension of the Black-Scholes implied volatility and can be used for volatility estimation, pricing options, and hedging. The researchers used a Bayesian framework to estimate this volatility, providing both a point estimate and a measure of its reliability. This approach allows for consistent pricing of illiquid options with liquid ones.