Are there gains from using information over the surface of implied volatilities?
journal contributionposted on 12.05.2022, 04:11 by B Guo, Q Han, Hai LinHai Lin
We investigate the out-of-sample predictability of implied volatility using the information over the implied volatility surface. We show that implied volatility surface is useful for the out-of-sample forecast of implied volatility up to 1 week ahead. Trading strategies based on the predictability of implied volatility could generate significant risk-adjusted gains after controlling for transaction costs. Significant results also depend on the way of modeling implied volatility surface. We then calibrate a two-factor stochastic volatility option pricing model to implied volatility data. Results show that implied volatility is better explained by both long- and short-term variance factors.
Preferred citationGuo, B., Han, Q. & Lin, H. (2018). Are there gains from using information over the surface of implied volatilities? Journal of Futures Markets, 38(6), 645-672. https://doi.org/10.1002/fut.21903
Journal titleJournal of Futures Markets
Online publication date23/02/2018
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economic significanceimplied volatilityout-of-sample forecasttwo-factor stochastic volatility modelSocial SciencesBusiness, FinanceBusiness & EconomicsEXPECTED STOCK RETURNSBOND EXCESS RETURNSBID-ASK SPREADSTERM STRUCTUREPREDICTABLE DYNAMICSMARKET-EFFICIENCYCURRENCY OPTIONSDIVIDEND YIELDSRISK PREMIARATESimplied volatility; price discovery; two-factor stochastic volatility model; out-of-sample forecast; economic significanceFinance