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Modelling the MIB30 implied volatility surface. Does market efficiency matter?

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Gianluca Cassesse
Massimo Guidolin

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Abstract

We analyze the volatility surface vs. moneyness and time to expiration implied by MIBO options written on the MIB30, the most important Italian stock index. We specify and fit a number of models of the implied volatility surface and find that it has a rich and interesting structure that strongly departs from a constant volatility, Black-Scholes benchmark. This result is robust to alternative econometric approaches, including generalized least squares approaches that take into account both the panel structure of the data and the likely presence of heteroskedasticity and serial correlation in the random disturbances. Finally we show that the degree of pricing efficiency of this options market can strongly condition the results of the econometric analysis and therefore our understanding of the pricing mechanism underlying observed MIBO option prices. Applications to value-at-risk and portfolio choice calculations illustrate the importance of using arbitrage-free data only.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-008.

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Date of creation: 2005
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Publication status: Published in International Review of Financial Analysis, 2006, 15(2), pp. 145-78
Handle: RePEc:fip:fedlwp:2005-008

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Keywords: Assets (Accounting) ; Prices;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May. [Downloadable!] (restricted)
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  7. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley. [Downloadable!]
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  13. George, Thomas J. & Longstaff, Francis A., 1993. "Bid-Ask Spreads and Trading Activity in the S&P 100 Index Options Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 381-397, September. [Downloadable!]
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  15. Gianluca Cassese & Massimo Guidolin, 2004. "Pricing and Informational Efficiency of the MIB30 Index Options Market. An Analysis with High-frequency Data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 275-321, 07. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Francesco Audrino & Dominik Colagelo, 2007. "Forecasting Implied Volatility Surfaces," University of St. Gallen Department of Economics working paper series 2007 2007-42, Department of Economics, University of St. Gallen. [Downloadable!]
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