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Author : Yi Sun
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (934 download)
Download or read book Predicting Implied Volatility Surface and Prices of S&P 500 Index Options written by Yi Sun and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Alejandro Bernales
Publisher :
ISBN 13 :
Total Pages : 40 pages
Book Rating : 4.:/5 (13 download)
Download or read book Can We Forecast the Implied Volatility Surface Dynamics of Equity Options? Predictability and Economic Value Tests written by Alejandro Bernales and published by . This book was released on 2013 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that the dynamics of the implied volatility surface of individual equity options may be associated with movements in the volatility surface of S&P 500 index options. We present evidence of strong predictable features in the cross-section of equity options and of dynamic linkages between the implied volatility surfaces of equity options and S&P 500 index options. Moreover, time-variations in stock option volatility surfaces are best predicted by incorporating information from the dynamics in the implied volatility surface of S&P 500 index options. We analyze the economic value of such dynamic patterns using strategies that trade straddle and delta-hedged portfolios, and we find that before transaction costs such strategies produce abnormal risk-adjusted returns.
Author : Sílvia Gonçalves
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface written by Sílvia Gonçalves and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: One key stylized fact in the empirical option pricing literature is the existence of an implied volatility surface (IVS). The usual approach consists of fitting a linear model linking the implied volatility to the time to maturity and the moneyness, for each cross section of options data. However, recent empirical evidence suggests that the parameters characterizing the IVS change over time. In this paper, we study whether the resulting predictability patterns in the IVS coefficients may be exploited in practice. We propose a two-stage approach to modeling and forecasting the Samp;P 500 index options IVS. In the first stage, we model the surface along the cross-sectional moneyness and time-to-maturity dimensions, similarly to Dumas, et. al., (1998). In the second-stage, we model the dynamics of the cross-sectional first-stage implied volatility surface coefficients by means of vector autoregression models. We find that not only the Samp;P 500 implied volatility surface can be successfully modeled, but also that its movements over time are highly predictable in a statistical sense. We then examine the economic significance of this statistical predictability with mixed findings. Whereas profitable delta-hedged positions can be set up that exploit the dynamics captured by the model under moderate transaction costs and when trading rules are selective in terms of expected gains from the trades, most of this profitability disappears when we increase the level of transaction costs and trade multiple contracts off wide segments of the IVS. This suggests that predictability of the time-varying Samp;P 500 implied volatility surface may be not inconsistent with market efficiency.
Author : Jaesun Noh
Publisher :
ISBN 13 :
Total Pages : 48 pages
Book Rating : 4.0/5 ( download)
Download or read book A Test of Efficiency for the S & P 500 Index Option Market Using Variance Forecasts written by Jaesun Noh and published by . This book was released on 1993 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: To forecast future option prices, autoregressive models of implied volatility derived from observed option prices are commonly employed [see Day and Lewis (1990), and Harvey and Whaley (1992)]. In contrast, the ARCH model proposed by Engle (1982) models the dynamic behavior in volatility, forecasting future volatility using only the return series of an asset. We assess the performance of these two volatility prediction models from S&P 500 index options market data over the period from September 1986 to December 1991 by employing two agents who trade straddles, each using one of the two different methods of forecast. Straddle trading is employed since a straddle does not need to be hedged. Each agent prices options according to her chosen method of forecast, buying (selling) straddles when her forecast price for tomorrow is higher (lower) than today's market closing price, and at the end of each day the rates of return are computed. We find that the agent using the GARCH forecast method earns greater profit than the agent who uses the implied volatility regression (IVR) forecast model. In particular, the agent using the GARCH forecast method earns a profit in excess of a cost of $0.25 per straddle with the near-the-money straddle trading.
Author : Silvia Goncalves
Publisher :
ISBN 13 :
Total Pages : 42 pages
Book Rating : 4.:/5 (586 download)
Download or read book Predictable Dynamics in the S & P 500 Index Options Implied Volatility Surface written by Silvia Goncalves and published by . This book was released on 2005 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Robert L. Geske
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Predicting the Volatility of the S&P 500 Equity Index written by Robert L. Geske and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents empirical tests of seven alternative estimators for the volatility of the Samp;P 500 equity index. Two of the estimators are the implied volatilities derived from the option models of Geske (1979) and Black-Scholes (1973) and using market prices for options. The Geske volatility estimator is stochastic, and this paper presents its first empirical tests. The Black-Scholes estimator in theory is deterministic, but herein when computed daily it is ad hoc allowed to change randomly with changes in the index level. The other five estimators are empirical, based on sample data. Four of the empirical estimators are GARCH approaches (GARCH11, EGARCH, TGARCH, and Heston-Nandi GARCH) which accommodate stochastic volatilities, and the fifth empirical estimator is simply the sample variance viewed as an historical estimate. All seven estimators are used to predict the actual realized volatility over the life of each option. If the market processes information efficiently, when the actual realized volatility over the option life is regressed on each estimator, the slope coefficient and intercept should be 1.0 and 0.0, respectively. In the case of the implied volatility estimators, this can be considered a test of these models. Our results show that in all cases the slope coefficients and intercepts of the implied volatilities are much closer to 1.0, more highly significant, have intercepts closer to 0.0 which are insignificant, and exhibit higher R2 than the empirical estimators. Furthermore, the Geske estimator appears better in these respects than this ad hoc Black-Scholes estimator. Encompassing regressions are run paring the Geske estimator separately with each of the five empirical estimators. In every encompassing regression test the slope coefficients and intercepts of the Geske estimator remain much closer to 1.0 and 0.0, respectively, while the competing estimators slope coefficients are much reduced from 1.0 toward 0.0, and are often insignificant. Thus, the Geske stochastic volatility estimator appears to capture a very significant portion but not all of the information relevant for predicting the volatility of the Samp;P 500 equity index.
Author : Luca Benzoni
Publisher :
ISBN 13 :
Total Pages : 62 pages
Book Rating : 4.:/5 (318 download)
Download or read book Can Standard Preferences Explain the Prices of Out of the Money S&P 500 Put Options written by Luca Benzoni and published by . This book was released on 2005 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S & P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S & P 500 put options have become 'expensive' relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has 'standard preferences' and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the 'volatility smirk' can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. We identify a realistic calibration of the model that simultaneously matches the empirical properties of dividends, the equity premium, the prices of both at-the-money and deep out-of-the-money puts, and the level of the risk-free rate. A more challenging question (that to our knowledge has not been previously investigated) is whether one can explain within a standard preference framework the stark regime change in the volatility smirk that has maintained since the 1987 market crash. To this end, we extend the model to a Bayesian setting in which the agent updates her beliefs about the average jump size in the event of a jump. Note that such beliefs only update at crash dates, and hence can explain why the volatility smirk has not diminished over the last eighteen years. We find that the model can capture the shape of the implied volatility curve both pre- and post-crash while maintaining reasonable estimates for expected returns, price-dividend ratios, and risk-free rates.
Author : Jaesun Noh
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (133 download)
Download or read book Forecasting Volatility and Option Prices of the S&P 500 Index written by Jaesun Noh and published by . This book was released on 1994 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Torben G. Andersen
Publisher :
ISBN 13 :
Total Pages : 33 pages
Book Rating : 4.:/5 (13 download)
Download or read book The Fine Structure of Equity-Index Option Dynamics written by Torben G. Andersen and published by . This book was released on 2015 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the evolution of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations over small time scales in the risk-neutral intensity of the negative jumps in the S&P 500 index, which is the dominant component of the short-maturity out-of-the-money put implied volatility dynamics, are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility, which is the dominant component in the short-maturity at-the-money option implied volatility dynamics, are best modeled as Gaussian with occasional jumps.
Author : Peter Carr
Publisher :
ISBN 13 :
Total Pages : 56 pages
Book Rating : 4.:/5 (13 download)
Download or read book Analyzing Volatility Risk and Risk Premium in Option Contracts written by Peter Carr and published by . This book was released on 2017 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we show that just like option implied volatilities, realized and expected volatilities can also be constructed specific to, and different across, option contracts. Applying the new theory to the S&P 500 index time series and options data, we extract volatility risk and risk premium from the volatility surfaces, and find that the extracted risk premium significantly predicts future stock returns.
Author : Juliusz Jablecki
Publisher :
ISBN 13 :
Total Pages : 20 pages
Book Rating : 4.:/5 (13 download)
Download or read book Simple Heuristics for Pricing VIX Options written by Juliusz Jablecki and published by . This book was released on 2014 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: The article presents a simple parameterization of the volatility surface for options on the S&P 500 volatility index, VIX. Specifically, we document the following features of VIX implied volatility: (i) VIX at-the-money (ATM) implied volatility correlates strongly with the volatility skew in S&P 500 options; (ii) VIX ATM implied volatility declines exponentially with options' time to expiry; (iii) a SABR-type model can be used to model the smile observed in VIX options. These observations lead to simple heuristics for quoting prices (in terms of implied volatility) of VIX options with almost arbitrary strike and expiry, obtaining values that are reasonably close to market levels.
Author : Roni Israelov
Publisher :
ISBN 13 :
Total Pages : 66 pages
Book Rating : 4.:/5 (13 download)
Download or read book Forecasting the Distribution of Option Returns written by Roni Israelov and published by . This book was released on 2017 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a method for constructing conditional option return distributions. In our model, uncertainty about the future option return has two sources: Changes in the position and shape of the implied volatility surface that shift option values (holding moneyness and maturity fixed), and changes in the underlying price which alter an option's location on the surface and thus its value (holding the surface fixed). We estimate a joint time series model of the spot price and volatility surface and use this to construct an ex ante characterization of the option return distribution via bootstrap. Our "ORB" (option return bootstrap) model accurately forecasts means, variances, and extreme quantiles of S&P 500 index conditional option return distributions across a wide range of strikes and maturities. We illustrate the value of our approach for practical economic problems such as risk management and portfolio choice. We also use the model to illustrate the risk and return tradeoff throughout the options surface conditional on being in a high or low risk state of the world. Comparing against our less structured but more accurate model predictions helps identify misspecification of risks and risk pricing in traditional no-arbitrage option models with stochastic volatility and jumps.
Author : Boleslaw Borkowski
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (137 download)
Download or read book Modeling and Estimating Volatility of Options on Standard & Poor's 500 Index written by Boleslaw Borkowski and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating volatility is crucial. Two approaches to estimate volatility are implied volatility and historical prices. Iterative techniques are applied, based on daily S&P index options. Additionally, using option data on S&P 500 Index listed on the Chicago Board of Options Exchange, historical volatility can be estimated.
Author : Stephen J. Taylor
Publisher :
ISBN 13 :
Total Pages : 64 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Information Content of Implied Volatilities and Model-Free Volatility Expectations written by Stephen J. Taylor and published by . This book was released on 2008 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: The volatility information content of stock options for individual firms is measured using option prices for 149 U.S. firms during the period from January 1996 to December 1999. Volatility forecasts defined by historical stock returns, at-the-money (ATM) implied volatilities and model-free (MF) volatility expectations are compared for each firm. The recently developed model-free volatility expectation incorporates information across all strike prices, and it does not require the specification of an option pricing model.Our analysis of ARCH models shows that, for one-day-ahead estimation, historical estimates of conditional variances outperform both the ATM and the MF volatility estimates extracted from option prices for more than one-third of the firms. This result contrasts with the consensus about the informational efficiency of options written on stock indices; several recent studies find that option prices are more informative than daily stock returns when estimating and predicting index volatility. However, for the firms with the most actively traded options, we do find that the option forecasts are nearly always more informative than historical stock returns. When the prediction horizon extends until the expiry date of the options, our regression results show that the option forecasts are more informative than forecasts defined by historical returns for a substantial majority (86%) of the firms. Although the model-free (MF) volatility expectation is theoretically more appealing than alternative volatility estimates and has been demonstrated to be the most accurate predictor of realized volatility by Jiang and Tian (2005) for the Samp;P 500 index, the results for our firms show that the MF expectation only outperforms both the ATM implied volatility and the historical volatility for about one-third of the firms. The firms for which the MF expectation is best are not associated with a relatively high level of trading in away-from-the-money options.
Author : George S. Skiadopoulos
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book The Dynamics of the S&P 500 Implied Volatility Surface written by George S. Skiadopoulos and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This empirical study is motivated by the literature on quot;smile-consistentquot; arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified under a variety of criteria. Subsequently, we develop a quot;Procrustesquot; type rotation in order to interpret the retained components. The results have implications for both option pricing and hedging and for the economics of option pricing.
Author : Peter Albert Abken
Publisher :
ISBN 13 :
Total Pages : 58 pages
Book Rating : 4.0/5 ( download)
Download or read book Pricing S&P 500 Index Options Using a Hilbert Space Basis written by Peter Albert Abken and published by . This book was released on 1996 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Zhina Zhang
Publisher :
ISBN 13 :
Total Pages : 108 pages
Book Rating : 4.:/5 (229 download)
Download or read book Forecasting Index Option Prices Using Implied Volatility and the Implications for the Efficiency of Options Markets written by Zhina Zhang and published by . This book was released on 2004 with total page 108 pages. Available in PDF, EPUB and Kindle. Book excerpt:
