Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface*
Recent evidence suggests that the parameters characterizing the implied volatility surface (IVS) in option prices are unstable. We study whether the resulting predictability patterns may be exploited. In a first stage we model the surface along cross-sectional moneyness and maturity dimensions. In a second stage we model the dynamics of the first-stage coefficients. We find that the movements of the S&P 500 IVS are highly predictable. Whereas profitable delta-hedged positions can be set up under selective trading rules, profits disappear when we increase transaction costs and trade on wide segments of the IVS.
Authors: Śılvia Gonçalves, Massimo Guidolin
Citations: 129
Published: 2006-04-10T00:00:00.000Z
Why It Matters
Venue: The Journal of Business. Year: 2006. Citations: 129. Abstract signal: Recent evidence suggests that the parameters characterizing the implied volatility surface (IVS) in option prices are unstable. We study whether the resulting predictability patterns may be exploited. In a first stage we...
Abstract
Recent evidence suggests that the parameters characterizing the implied volatility surface (IVS) in option prices are unstable. We study whether the resulting predictability patterns may be exploited. In a first stage we model the surface along cross-sectional moneyness and maturity dimensions. In a second stage we model the dynamics of the first-stage coefficients. We find that the movements of the S&P 500 IVS are highly predictable. Whereas profitable delta-hedged positions can be set up under selective trading rules, profits disappear when we increase transaction costs and trade on wide segments of the IVS.
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