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

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  • Sílvia Gonçalves

    (Department of Economics, CIREQ and CIRANO, Université de Montréal)

  • Massimo Guidolin

    (Federal Reserve Bank of St. Louis)

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.

Suggested Citation

  • Sílvia Gonçalves & Massimo Guidolin, 2006. "Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1591-1636, May.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1591-1636
    DOI: 10.1086/500686
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