Expectations Hypothesis of the Term Structure of Implied Volatility: Evidence from Foreign Currency and Stock Index Options
AbstractUsing a stochastic volatility option pricing model, we show that the implied volatilities of at-the-money options are not necessarily unbiased and that the fixed interval time-series can produce misleading results. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities, but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline. The results are similar for both foreign currency and the S&P 500 stock index options. , .
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 1 (2003)
Issue (Month): 1 ()
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- Elizaveta Krylova & Jussi Nikkinen & Sami Vähämaa, 2005.
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Working Paper Series
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- Krylova, Elizaveta & Nikkinen, Jussi & Vähämaa, Sami, 2009. "Cross-dynamics of volatility term structures implied by foreign exchange options," Journal of Economics and Business, Elsevier, vol. 61(5), pages 355-375, September.
- Äijö, Janne, 2008. "Implied volatility term structure linkages between VDAX, VSMI and VSTOXX volatility indices," Global Finance Journal, Elsevier, vol. 18(3), pages 290-302.
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