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Implied Volatility (implied + volatility)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	95%
Mathematics and Statistics	4%

Kinds of Implied Volatility

option implied volatility

Selected Abstracts

FORECASTING STOCK INDEX VOLATILITY: COMPARING IMPLIED VOLATILITY AND THE INTRADAY HIGH,LOW PRICE RANGE

THE JOURNAL OF FINANCIAL RESEARCH, Issue 2 2007
Charles Corrado
Abstract The intraday high,low price range offers volatility forecasts similarly efficient to high-quality implied volatility indexes published by the Chicago Board Options Exchange (CBOE) for four stock market indexes: S&P 500, S&P 100, NASDAQ 100, and Dow Jones Industrials. Examination of in-sample and out-of-sample volatility forecasts reveals that neither implied volatility nor intraday high,low range volatility consistently outperforms the other. [source]

The Determinants of Implied Volatility: A Test Using LIFFE Option Prices

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 7-8 2000
L. Copeland
This paper presents and tests a model of the volatility of individual companies' stocks, using implied volatilities derived from option prices. The data comes from traded options quoted on the London International Financial Futures Exchange. The model relates equity volatilities to corporate earnings announcements, interest-rate volatility and to four determining variables representing leverage, the degree of fixed-rate debt, asset duration and cash flow inflation indexation. The model predicts that equity volatility is positively related to duration and leverage and negatively related to the degree of inflation indexation and the proportion of fixed-rate debt in the capital structure. Empirical results suggest that duration, the proportion of fixed-rate debt, and leverage are significantly related to implied volatility. Regressions using all four determining variables explain approximately 30% of the cross-sectional variation in volatility. Time series tests confirm an expected drop in volatility shortly after the earnings announcement and in most cases a positive relationship between the volatility of the stock and the volatility of interest rates. [source]

Volatility linkages of the equity, bond and money markets: an implied volatility approach

ACCOUNTING & FINANCE, Issue 1 2009
Kent Wang
G12; G14 Abstract This study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets. [source]

Neural network volatility forecasts

INTELLIGENT SYSTEMS IN ACCOUNTING, FINANCE & MANAGEMENT, Issue 3-4 2007
José R. Aragonés
We analyse whether the use of neural networks can improve ,traditional' volatility forecasts from time-series models, as well as implied volatilities obtained from options on futures on the Spanish stock market index, the IBEX-35. One of our main contributions is to explore the predictive ability of neural networks that incorporate both implied volatility information and historical time-series information. Our results show that the general regression neural network forecasts improve the information content of implied volatilities and enhance the predictive ability of the models. Our analysis is also consistent with the results from prior research studies showing that implied volatility is an unbiased forecast of future volatility and that time-series models have lower explanatory power than implied volatility. Copyright © 2008 John Wiley & Sons, Ltd. [source]

The Determinants of Implied Volatility: A Test Using LIFFE Option Prices

TERM STRUCTURES OF IMPLIED VOLATILITIES: ABSENCE OF ARBITRAGE AND EXISTENCE RESULTS

MATHEMATICAL FINANCE, Issue 1 2008
Martin Schweizer
This paper studies modeling and existence issues for market models of stochastic implied volatility in a continuous-time framework with one stock, one bank account, and a family of European options for all maturities with a fixed payoff function h. We first characterize absence of arbitrage in terms of drift conditions for the forward implied volatilities corresponding to a general convex h. For the resulting infinite system of SDEs for the stock and all the forward implied volatilities, we then study the question of solvability and provide sufficient conditions for existence and uniqueness of a solution. We do this for two examples of h, namely, calls with a fixed strike and a fixed power of the terminal stock price, and we give explicit examples of volatility coefficients satisfying the required assumptions. [source]

THE EIGENFUNCTION EXPANSION METHOD IN MULTI-FACTOR QUADRATIC TERM STRUCTURE MODELS

MATHEMATICAL FINANCE, Issue 4 2007
Nina Boyarchenko
We propose the eigenfunction expansion method for pricing options in quadratic term structure models. The eigenvalues, eigenfunctions, and adjoint functions are calculated using elements of the representation theory of Lie algebras not only in the self-adjoint case, but in non-self-adjoint case as well; the eigenfunctions and adjoint functions are expressed in terms of Hermite polynomials. We demonstrate that the method is efficient for pricing caps, floors, and swaptions, if time to maturity is 1 year or more. We also consider subordination of the same class of models, and show that in the framework of the eigenfunction expansion approach, the subordinated models are (almost) as simple as pure Gaussian models. We study the dependence of Black implied volatilities and option prices on the type of non-Gaussian innovations. [source]

The Term Structure of Simple Forward Rates with Jump Risk

MATHEMATICAL FINANCE, Issue 3 2003
Paul Glasserman
This paper characterizes the arbitrage-free dynamics of interest rates, in the presence of both jumps and diffusion, when the term structure is modeled through simple forward rates (i.e., through discretely compounded forward rates evolving continuously in time) or forward swap rates. Whereas instantaneous continuously compounded rates form the basis of most traditional interest rate models, simply compounded rates and their parameters are more directly observable in practice and are the basis of recent research on "market models." We consider very general types of jump processes, modeled through marked point processes, allowing randomness in jump sizes and dependence between jump sizes, jump times, and interest rates. We make explicit how jump and diffusion risk premia enter into the dynamics of simple forward rates. We also formulate reasonably tractable subclasses of models and provide pricing formulas for some derivative securities, including interest rate caps and options on swaps. Through these formulas, we illustrate the effect of jumps on implied volatilities in interest rate derivatives. [source]

The economic significance of conditional skewness in index option markets

THE JOURNAL OF FUTURES MARKETS, Issue 4 2010
Ranjini Jha
This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness-based option-pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward-looking option implied volatilities, can significantly improve the performance of skewness-based trades but trading costs considerably weaken the profitability of index option strategies. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:378,406, 2010 [source]

Consistent calibration of HJM models to cap implied volatilities

THE JOURNAL OF FUTURES MARKETS, Issue 11 2005
Flavio Angelini
This article proposes a calibration algorithm that fits multifactor Gaussian models to the implied volatilities of caps with the use of the respective minimal consistent family to infer the forward-rate curve. The algorithm is applied to three forward-rate volatility structures and their combination to form two-factor models. The efficiency of the consistent calibration is evaluated through comparisons with nonconsistent methods. The selection of the number of factors and of the volatility functions is supported by a principal-component analysis. Models are evaluated in terms of in-sample and out-of-sample data fitting as well as stability of parameter estimates. The results are analyzed mainly by focusing on the capability of fitting the market-implied volatility curve and, in particular, reproducing its characteristic humped shape. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1093,1120, 2005 [source]

Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options

THE JOURNAL OF FUTURES MARKETS, Issue 12 2004
Kam C. Chan
We use the net buying pressure hypothesis of N. P. B. Bollen and R. Whaley (2004) to examine the implied volatilities, options premiums, and options trading profits at various time-intervals across five different moneyness categories of Hong Kong Hang Seng Index (HSI) options. The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out-of-the-money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis. First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1165,1194, 2004 [source]

Implied volatility forecasts in the grains complex

THE JOURNAL OF FUTURES MARKETS, Issue 10 2002
David P. Simon
This article finds that the implied volatilities of corn, soybean, and wheat futures options 4 weeks before option expiration have significant predictive power for the underlying futures contract return volatilities through option expiration from January 1988 through September 1999. These implied volatilities also encompass the information in out-of-sample seasonal Glosten, Jagannathan, and Runkle (GJR;1993) volatility forecasts. Evidence also demonstrates that when corn-implied volatility rises relative to out-of-sample seasonal GJR volatility forecasts, implied volatility substantially overpredicts realized volatility. However, simulations of trading rules that involve selling corn option straddles when corn-implied volatility is high relative to out-of-sample GJR volatility forecasts indicate that none of the trading rules would have been significantly profitable. This finding suggests that these options are not necessarily overpriced. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:959,981, 2002 [source]

The drift factor in biased futures index pricing models: A new look

THE JOURNAL OF FUTURES MARKETS, Issue 6 2002
W. Brian Barrett
The presence of bias in index futures prices has been investigated in various research studies. Redfield (11) asserted that the U.S. Dollar Index (USDX) futures contract traded on the U.S. Cotton Exchange (now the FINEX division of the New York Board of Trade) could be systematically arbitraged for nontrivial returns because it is expressed in so-called "European terms" (foreign currency units/U.S. dollar). Eytan, Harpaz, and Krull (4) (EHK) developed a theoretical factor using Brownian motion to correct for the European terms and the bias due to the USDX index being expressed as a geometric average. Harpaz, Krull, and Yagil (5) empirically tested the EHK index. They used the historical volatility to proxy the EHK volatility specification. Since 1990, it has become more commonplace to use option-implied volatility for forecasting future volatility. Therefore, we have substituted option implied volatilities into EHK's correction factor and hypothesized that the correction factor is "better" ex ante and therefore should lead to better futures model pricing. We tested this conjecture using twelve contracts from 1995 through 1997 and found that the use of implied volatility did not improve the bias correction over the use of historical volatility. Furthermore, no matter which volatility specification we used, the model futures price appeared to be mis-specified. To investigate further, we added a simple naïve , based on a modification of the adaptive expectations model. Repeating the tests using this naïve "drift" factor, it performed substantially better than the other two specifications. Our conclusion is that there may be a need to take a new look at the drift-factor specification currently in use. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:579,598, 2002 [source]

A High-Frequency Investigation of the Interaction between Volatility and DAX Returns

EUROPEAN FINANCIAL MANAGEMENT, Issue 3 2010
Philippe Masset
G10; G12; G13 Abstract One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead-lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse-response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5-minute intervals, we find that the relationship is return-driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns. [source]

Options and earnings announcements: an empirical study of volatility, trading volume, open interest and liquidity

EUROPEAN FINANCIAL MANAGEMENT, Issue 2 2000
Monique, W.M. Donders
In this paper we study the impact of earnings announcements on implied volatility, trading volume, open interest and spreads in the stock options market. We find that implied volatility increases before announcement days and drops afterwards. Also option trading volume is higher around announcement days. During the days before the announcement open interest tends to increase, while it returns to regular levels afterwards. Changes in the quoted spread largely respond to higher trading volume and changes in implied volatility. The effective spread increases on the event day and on the first two days following the earnings announcement. [source]

Volatility linkages of the equity, bond and money markets: an implied volatility approach

Neural network volatility forecasts

The Determinants of Implied Volatility: A Test Using LIFFE Option Prices

Impact of WASDE reports on implied volatility in corn and soybean markets,

AGRIBUSINESS : AN INTERNATIONAL JOURNAL, Issue 4 2008
Olga Isengildina-Massa
This study investigates the impact of U.S. Department of Agriculture World Agricultural Supply and Demand Estimate (WASDE) reports on implied volatility in corn and soybean markets over 1985 to 2002. If WASDE reports resolve uncertainty, implied volatility should drop immediately after release of the reports. Results show that WASDE reports lead to a statistically significant reduction of implied volatility that averages 0.7 percentage points for corn and 0.8 percentage points for soybeans. The magnitude of the reduction is largest for the group of WASDE reports containing both domestic and international situation and outlook information. This group of reports reduces implied volatility by an average of 1.1 percentage points in corn and by almost 1.5 percentage points in soybeans. Results also reveal that the market impact of WASDE reports is strongest in the most recent 1996 to 2002 subperiod. Overall, the results indicate that WASDE reports provide valuable information to corn and soybean market participants. [JEL classifications: Q100, Q110, Q130]. © 2008 Wiley Periodicals, Inc. [source]

TERM STRUCTURES OF IMPLIED VOLATILITIES: ABSENCE OF ARBITRAGE AND EXISTENCE RESULTS

PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY

MATHEMATICAL FINANCE, Issue 2 2006
Vadim Linetsky
We solve in closed form a parsimonious extension of the Black,Scholes,Merton model with bankruptcy where the hazard rate of bankruptcy is a negative power of the stock price. Combining a scale change and a measure change, the model dynamics is reduced to a linear stochastic differential equation whose solution is a diffusion process that plays a central role in the pricing of Asian options. The solution is in the form of a spectral expansion associated with the diffusion infinitesimal generator. The latter is closely related to the Schrödinger operator with Morse potential. Pricing formulas for both corporate bonds and stock options are obtained in closed form. Term credit spreads on corporate bonds and implied volatility skews of stock options are closely linked in this model, with parameters of the hazard rate specification controlling both the shape of the term structure of credit spreads and the slope of the implied volatility skew. Our analytical formulas are easy to implement and should prove useful to researchers and practitioners in corporate debt and equity derivatives markets. [source]

Modelling Regime-Specific Stock Price Volatility,

OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 6 2009
Carol Alexander
Abstract Single-state generalized autoregressive conditional heteroscedasticity (GARCH) models identify only one mechanism governing the response of volatility to market shocks, and the conditional higher moments are constant, unless modelled explicitly. So they neither capture state-dependent behaviour of volatility nor explain why the equity index skew persists into long-dated options. Markov switching (MS) GARCH models specify several volatility states with endogenous conditional skewness and kurtosis; of these the simplest to estimate is normal mixture (NM) GARCH, which has constant state probabilities. We introduce a state-dependent leverage effect to NM-GARCH and thereby explain the observed characteristics of equity index returns and implied volatility skews, without resorting to time-varying volatility risk premia. An empirical study on European equity indices identifies two-state asymmetric NM-GARCH as the best fit of the 15 models considered. During stable markets volatility behaviour is broadly similar across all indices, but the crash probability and the behaviour of returns and volatility during a crash depends on the index. The volatility mean-reversion and leverage effects during crash markets are quite different from those in the stable regime. [source]

RISK PREMIUM EFFECTS ON IMPLIED VOLATILITY REGRESSIONS

THE JOURNAL OF FINANCIAL RESEARCH, Issue 2 2010
Leonidas S. Rompolis
Abstract This article provides new insights into the sources of bias of option implied volatility to forecast its physical counterpart. We argue that this bias can be attributed to volatility risk premium effects. The latter are found to depend on high-order cumulants of the risk-neutral density. These cumulants capture the risk-averse behavior of investors in the stock and option markets for bearing the investment risk that is reflected in the deviations of the implied risk-neutral distribution from the normal distribution. We show that the bias of implied volatility to forecast its corresponding physical measure can be eliminated when the implied volatility regressions are adjusted for risk premium effects. The latter are captured mainly by the third-order risk-neutral cumulant. We also show that a substantial reduction of higher order risk-neutral cumulants biases to predict their corresponding physical cumulants is supported when adjustments for risk premium effects are made. [source]

FORECASTING STOCK INDEX VOLATILITY: COMPARING IMPLIED VOLATILITY AND THE INTRADAY HIGH,LOW PRICE RANGE

Forecasting volatility: Roles of sampling frequency and forecasting horizon,

THE JOURNAL OF FUTURES MARKETS, Issue 12 2010
Wing Hong Chan
This study empirically tests how and to what extent the choice of the sampling frequency, the realized volatility (RV) measure, the forecasting horizon and the time-series model affect the quality of volatility forecasting. Using highly synchronous executable quotes retrieved from an electronic trading platform, the study avoids the influence of various market microstructure factors in measuring RV with high-frequency intraday data and in inferring implied volatility (IV) from option prices. The study shows that excluding non-trading-time volatility produces significant downward bias of RV by as much as 36%. Quality of prediction is significantly affected by the forecasting horizon and RV model, but is largely immune from the choice of sampling frequency. Consistent with prior research, IV outperforms time-series forecasts; however, the information content of historical volatility critically depends on the choice of RV measure. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark [source]

Examination of long-term bond iShare option selling strategies

THE JOURNAL OF FUTURES MARKETS, Issue 5 2010
David P. SimonArticle first published online: 31 JUL 200
This article examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. Unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. Short-term option selling strategies are enhanced when implied volatility is high relative to time series volatility forecasts. Risk management strategies such as stop loss orders detract from profitability, while take profit orders have only modest favorable effects on profitability. Overall, the results demonstrate that TLT option selling strategies offered attractive risk-return tradeoffs over the sample period. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:465,489, 2010 [source]

Who knows more about future currency volatility?

THE JOURNAL OF FUTURES MARKETS, Issue 3 2009
Charlie Charoenwong
We use four currency pairs from October 1, 2001 to September 29, 2006 to compare the predictive power of the implied volatility derived from currency option prices that are traded on the Philadelphia Stock Exchange (PHLX), Chicago Mercantile Exchange (CME), and over-the-counter market (OTC). Among the competing implied volatility forecasts, OTC-implied volatility subsumes the information content of PHLX- and CME-implied volatility. Consistent with extant studies our result also shows that the implied volatility provides more information about future volatility,regardless of whether it is from the OTC, PHLX, or CME markets,than time series based volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:270,295, 2009 [source]

Smiling less at LIFFE

THE JOURNAL OF FUTURES MARKETS, Issue 1 2008
Bing-Huei Lin
This study investigates the structure of the implied volatility smile, using the prices of equity options traded on the LIFFE. First, the slope of the implied volatility curve is significantly negative for both individual stocks and index options, and the slope is less negative for longer-term options. The implied volatility skew can be described by risk-neutral skewness and kurtosis, with the former having the first-order effect. Moreover, the implied volatility skew for individual stock options is less severe than for index options. Finally, the relationship between the real and risk-neutral moments implied in option prices is significant. The results indicate that, for equity options traded on the LIFFE, the slope of the implied volatility skew is flatter than that on the Chicago Board of Exchange (CBOE). © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:57,81, 2008 [source]

The information content of option implied volatility surrounding the 1997 Hong Kong stock market crash

THE JOURNAL OF FUTURES MARKETS, Issue 6 2007
Joseph K. W. Fung
This study examines the information conveyed by options and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The author determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other leading indicator candidates. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, nonoverlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The study also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility. These results indicate that the options market is highly efficient informationally. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:555,574, 2007 [source]

Multifactor implied volatility functions for HJM models

THE JOURNAL OF FUTURES MARKETS, Issue 8 2006
I-Doun Kuo
This study evaluates two one-factor, two two-factor, and two three-factor implied volatility functions in the HJM class, with the use of eurodollar futures options across both strike prices and maturities. The primary contributions of this article are (a) to propose and test three implied volatility multifactor functions not considered by K. I. Amin and A. J. Morton (1994), (b) to evaluate models using the AIC criteria as well as other standard criteria neglected by S. Y. M. Zeto (2002), and (c) to .nd that multifactor models incorporating the exponential decaying implied volatility functions generally outperform other models in .tting and prediction, in sharp contrast to K. I. Amin and A. J. Morton, who find the constantvolatility model superior. Correctly specified and calibrated simple constant and square-root factor models may be superior to inappropriate multifactor models in option trading and hedging strategies. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:809,833, 2006 [source]