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Smile in Motion : An Intraday Analysis of Asymmetric Implied Volatility

BP2-STS

    20.08.2012

34

volatility smile
implied volatility
leverage effect
index options
highfrequency data
English We present a new method to measure the intraday relationship between movements of implied volatility smiles and stock returns. It is based on an enhanced smile regression model which captures patterns in the intraday data which have not yet been reported in the literature. Using transaction data for exchange-traded EuroStoxx 50 options from 2000 to 2011 and DAX options from 1995 to 2011, we show that, on average, about 99% of the intraday variation of implied volatility can be explained by moneyness and changes in the index level. Compared to the typical smile regression with moneyness alone, about 50% of the remaining errors can be attributed to movements in the underlying index. We find that the intraday evolution of volatility smiles is generally not consistent with traders' rules of thumb such as the sticky strike or sticky delta rule. On average, the impact of index return on implied volatility is 1.3 to 1.5 times stronger than the sticky strike rule predicts. The main factor driving variations of this adjustment factor is the index return. Our results have implications for option valuation, hedging and the understanding of the leverage effect.
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Faculty
Faculté des sciences économiques et sociales et du management
Language
  • English
Classification
Economics
Series statement
  • Working Papers SES ; 427
License
License undefined
Identifiers
  • RERO DOC 29639
  • RERO R007164258
Persistent URL
https://folia.unifr.ch/unifr/documents/302494
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