TIME-VARYING VOLATILITIES AND CALCULATION OF THE WEIGHTED IMPLIED STANDARD-DEVIATION

Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devisi ng an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basic ally similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of exp iration-specific WISDs, as opposed to standard composite WISDs, result s in improved performance of option pricing models.