Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface

Sílvia Gonçalves and Massimo Guidolin ()
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Sílvia Gonçalves: Department of Economics, CIREQ and CIRANO, Université de Montréal

Journal of Business, 2006, vol. 79, issue 3, pages 1591-1636

Abstract: Recent evidence suggests that the parameters characterizing the implied volatility surface (IVS) in option prices are unstable. We study whether the resulting predictability patterns may be exploited. In a first stage we model the surface along cross-sectional moneyness and maturity dimensions. In a second stage we model the dynamics of the first-stage coefficients. We find that the movements of the S&P 500 IVS are highly predictable. Whereas profitable delta-hedged positions can be set up under selective trading rules, profits disappear when we increase transaction costs and trade on wide segments of the IVS.

Date: 2006

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Working Paper: Predictable dynamics in the S&P 500 index options implied volatility surface (2005)
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