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The Fine Structure of Equity-Index Option Dynamics

Torben Andersen, Oleg Bondarenko (), Viktor Todorov () and George Tauchen ()
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Oleg Bondarenko: University of Illinois at Chicago, Postal: 601 South Morgan Street, Room 2431, Chicago, IL 60607-7124, USA
Viktor Todorov: Northwestern University and CREATES, Postal: Department of Finance, Kellogg School of Management, 2001 Sheridan Road, Evanston, IL 60208, USA

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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 movements 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 in the risk-neutral intensity of the negative jumps in the S&P 500 index over small time scales are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility are best modeled as Gaussian with occasional jumps.

Keywords: VPIN; 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)
Pages: 32
Date: 2013-01-11
New Economics Papers: this item is included in nep-cfn and nep-mst
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Journal Article: The fine structure of equity-index option dynamics (2015) Downloads
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