The fine structure of equity-index option dynamics

Torben Andersen, Oleg Bondarenko, Viktor Todorov and George Tauchen ()

Journal of Econometrics, 2015, vol. 187, issue 2, 532-546

Abstract: We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the evolution of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations over small time scales in the risk-neutral intensity of the negative jumps in the S&P 500 index, which is the dominant component of the short-maturity out-of-the-money put implied volatility dynamics, are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility, which is the dominant component in the short-maturity at-the-money option implied volatility dynamics, are best modeled as Gaussian with occasional jumps.

Keywords: High-frequency data; Implied volatility; Jump activity; Kolmogorov–Smirnov test; Stable process; Stochastic volatility; VIX index (search for similar items in EconPapers)
JEL-codes: C51 C52 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: The Fine Structure of Equity-Index Option Dynamics (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:187:y:2015:i:2:p:532-546

DOI: 10.1016/j.jeconom.2015.02.037

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