Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface*
Year: 2006
Type: article
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.
Source: The Journal of Business
DOI: 10.1086/500686
Authors: Sílvia Gonçalves, Massimo Guidolin
Institutions: Université de Montréal, University of Manchester
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125810634