The Fine Structure of Equity-Index Option Dynamics
We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the movements of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations in the risk-neutral intensity of the negative jumps in the S&P 500 index over small time scales are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility are best modeled as Gaussian with occasional jumps.
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.:
- George Tauchen & Viktor Todorov, 2010.
"Activity Signature Functions for High-Frequency Data Analysis,"
10-08, Duke University, Department of Economics.
- Todorov, Viktor & Tauchen, George, 2010. "Activity signature functions for high-frequency data analysis," Journal of Econometrics, Elsevier, vol. 154(2), pages 125-138, February.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2006.
"Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 4(1), pages 1-30.
- Neil Shephard & Ole Barndorff-Nielsen, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Series Working Papers 2004-FE-01, University of Oxford, Department of Economics.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Papers 2003-W21, Economics Group, Nuffield College, University of Oxford.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometrics of testing for jumps in financial economics using bipower variationÂ ," OFRC Working Papers Series 2004fe01, Oxford Financial Research Centre.
- Tim Bollerslev & Viktor Todorov, 2009.
"Tails, Fears and Risk Premia,"
CREATES Research Papers
2009-26, School of Economics and Management, University of Aarhus.
- Geman, Hélyette & Carr, Peter & Madan, Dilip B. & Yor, Marc, 2003. "Stochastic Volatility for Levy Processes," Economics Papers from University Paris Dauphine 123456789/1392, Paris Dauphine University.
When requesting a correction, please mention this item's handle: RePEc:aah:create:2013-52. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.