Implied Volatility and Volatility Smiles in Option-Pricing-Based Security and Business Valuations

Abstract

In estimating target companies' volatilities, practitioners typically consider the volatility of guideline public companies (GPCs). This paper discusses various methods for estimating GPC volatilities with a focus on implied volatilities and volatility smiles. The paper finds that implied volatilities are theoretically superior to volatilities calculated from historical data, although the usefulness of implied volatilities is often limited by the availability of option data.