We examine the effect of transaction costs on implied volatility structure, parameter estimation, and hedging. Using simulations, we document that: (1) Transaction costs can generate the volatility smile phenomena even in the Black-Scholes economy. Especially, volatility smile effect is very...

In the U.S. stock and options markets from January 1996 to December 2013, we examine whether information uncertainty explains the discrepancy between historical and implied volatilities in Goyal and Saretto (2009). In addition, we clarified the impact of the uncertainty on the stock market as...