Information Content in Sneer Asymmetry: An Application to Out-of-Sample Implied Volatility Forecasting

Youngsoo Choi, Steven J. Jordan and Wonchang Lee

Emerging Markets Finance and Trade, 2015, vol. 51, issue S3, 34-51

Abstract: The ad hoc Black-Scholes (AHBS) is one of the most widely used option valuation models among practitioners. The main contribution of this study is that we improve the out-of-sample forecast accuracy of the AHBS model. First, we make the empirical observation that the call and put sneers are discontinuous and have different slopes when moneyness is equal to one. Next, we propose a new data usage methodology that incorporates the information contained in the asymmetric response of the call and put sneers. Our new method provides more accurate out-of-sample forecasts for several intraday time horizons. Our results are robust across several dimensions, including time period, forecast horizon, moneyness, and model specification.

Date: 2015
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DOI: 10.1080/1540496X.2015.1039900

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