Title

The Term Structure and S&P100 Model-Free Volatilities

Publication Type

Journal Article

Publication Date

2013

Abstract

We develop an improved method to obtain the model-free volatility more accurately despite the limitations of a finite number of options and large strike price intervals. Our method computes the model-free volatility from European-style S&P 100 index options over a horizon of up to 450 days, the first time that this has been attempted, as far as we are aware. With the estimated daily term structure over the long horizon, we find that (i) changes in model-free volatilities are asymmetrically more positively impacted by a decrease in the index level than negatively impacted by an increase in the index level; (ii) the negative relationship between the daily change in model-free volatility and the daily change in index level is stronger in the near term than in the far term; and (iii) the slope of the term structure is positively associated with the index level, having a tendency to display a negative slope during bear markets and a positive slope during bull markets. These significant results have important implications for pricing and hedging index derivatives and portfolios.

Keywords

Volatility modelling, Empirical finance, Options volatility, Options, Applied econometrics

Discipline

Finance and Financial Management

Research Areas

Quantitative Finance

Publication

Quantitative Finance

Volume

13

Issue

7

First Page

1041

Last Page

1058

ISSN

1469-7688

Identifier

10.1080/14697688.2012.751493

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