Testing Extended Rules of Thumb for the Dynamics of Volatility Surfaces
(2019) NEKH02 20182Department 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:
http://lup.lub.lu.se/student-papers/record/8966946
- author
- Mellström, Joar LU
- supervisor
- organization
- course
- NEKH02 20182
- year
- 2019
- 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}}, }