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Joint Modeling of Call and Put Implied Volatility

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  • Ahoniemi, Katja
  • Lanne, Markku

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6318.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:6318

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Keywords: Implied Volatility; Option Markets; Multiplicative Error Models; Forecasting;

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References

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Cited by:
  1. Panayiotis Andreou & Chris Charalambous & Spiros Martzoukos, 2014. "Assessing the performance of symmetric and asymmetric implied volatility functions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 373-397, April.
  2. Fabrizio Cipollini & Robert F. Engle & Giampiero M. Gallo, 2009. "Semiparametric vector MEM," Econometrics Working Papers Archive wp2009_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
  3. Cipollini, Fabrizio & Gallo, Giampiero M., 2010. "Automated variable selection in vector multiplicative error models," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2470-2486, November.
  4. Lanne, Markku & Ahoniemi, Katja, 2008. "Implied Volatility with Time-Varying Regime Probabilities," MPRA Paper 23721, University Library of Munich, Germany.

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