【IMIWorkingPaperNo.1903[EN]】AreThereGainsFromUsingInformationOvertheSurfaceofImpliedVolatilities?

【Abstract】

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.

【Keywords】

Economic significance, Implied volatility, Out-of-sample forecast, Two-factor stochastic volatility model

【Authors】

Guo Biao,School of Finance, Renmin University of China, Beijing, China；IMI Research fellow.
Han Qian, Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen, China.
Lin Hai, School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand.