Implied volatility surfaces: uncovering regularities for options on financial futures

It is well known that the implied volatilities of options on the same underlying asset differ across strike prices and terms to expiration. However, the reason for this remains unclear. Before the development of theory to explain this phenomenon, it may be helpful to better understand the empirical record of implied volatility surfaces. If regularities are discovered which are stable over time, this may aid the development of theories to explain implied volatility surfaces and provide a means to test alternative models. This paper identifies these regularities and subsequent research will examine the implications of these results. While a number of papers have examined individual option markets and identified smile patterns, it is not clear whether the conclusions found are based upon idiosyncrasies of a particular market or more generally apply to options in other markets. This research fills this gap in the literature by examining sixteen options markets on financial futures (comprising four asset classes) and compares the smile patterns across markets. Furthermore, this analysis considers a longer period of analysis than previously examined in the literature. This allows assessment of the stability of the implied volatility patterns for a variety of subperiods and testing of models outside of sample.