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LUND UNIVERSITY LIBRARIES

Testing Extended Rules of Thumb for the Dynamics of Volatility Surfaces

Mellström, Joar LU (2019) NEKH02 20182
Department of Economics
Abstract
It is a common practise to quote option prices using their BlackScholes implied volatility. A volatility surface describes an options implied volatility as a function of the strike price and time to maturity. It can be used as a tool for hedging but also valuation when prices are not directly observable. The short-term evolution of this surface has been described by a variety of apocryphal rules. Three of these rules are tested empirically for exchange traded S&P 500 index options for two distinguished periods. The square root of time rule, consistent with the no-arbitrage condition, has the highest explanatory and predictive power. Extended versions are also derived but with no significant improvement.
Please use this url to cite or link to this publication:
author
Mellström, Joar LU
supervisor
organization
course
NEKH02 20182
year
type
M2 - Bachelor Degree
subject
keywords
Volatility Surface, Implied Volatility, Rules of Thumb, NoArbitrage Condition, Index Options
language
English
id
8966946
date added to LUP
2019-02-15 14:53:23
date last changed
2019-02-15 14:53:23
@misc{8966946,
  abstract     = {{It is a common practise to quote option prices using their BlackScholes implied volatility. A volatility surface describes an options implied volatility as a function of the strike price and time to maturity. It can be used as a tool for hedging but also valuation when prices are not directly observable. The short-term evolution of this surface has been described by a variety of apocryphal rules. Three of these rules are tested empirically for exchange traded S&P 500 index options for two distinguished periods. The square root of time rule, consistent with the no-arbitrage condition, has the highest explanatory and predictive power. Extended versions are also derived but with no significant improvement.}},
  author       = {{Mellström, Joar}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Testing Extended Rules of Thumb for the Dynamics of Volatility Surfaces}},
  year         = {{2019}},
}