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

Silvia Goncalves () and Massimo Guidolin

The Journal of Business, 2006, vol. 79, issue 3, 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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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1591-1636

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