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Joint Modeling of Call and Put Implied Volatility

Katja Ahoniemi and Markku Lanne

MPRA Paper from University Library of Munich, Germany

Abstract: This paper exploits the fact that implied volatilities calculated from identical call and put options have often been empirically found to differ, although they should be equal in theory. We propose a new bivariate mixture multiplicative error model and show that it is a good fit to Nikkei 225 index call and put option implied volatility (IV). A good model fit requires two mixture components in the model, allowing for different mean equations and error distributions for calmer and more volatile days. Forecast evaluation indicates that in addition to jointly modeling the time series of call and put IV, cross effects should be added to the model: putside implied volatility helps forecast callside IV, and vice versa. Impulse response functions show that the IV derived from put options recovers faster from shocks, and the effect of shocks lasts for up to six weeks.

Keywords: Implied Volatility; Option Markets; Multiplicative Error Models; Forecasting (search for similar items in EconPapers)
JEL-codes: C32 C53 G13 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Citations: View citations in EconPapers (2) Track citations by RSS feed

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https://mpra.ub.uni-muenchen.de/6318/1/MPRA_paper_6318.pdf original version (application/pdf)

Related works:
Journal Article: Joint modeling of call and put implied volatility (2009) Downloads
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