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The Fine Structure of Equity-Index Option Dynamics

  • Torben G. Andersen

    ()

    (Northwestern University and CREATES)

  • Oleg Bondarenko

    ()

    (University of Illinois at Chicago)

  • Viktor Todorov

    ()

    (Northwestern University and CREATES)

  • George Tauchen

    ()

    (Duke University)

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.

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File URL: ftp://ftp.econ.au.dk/creates/rp/13/rp13_52.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-52.

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Length: 32
Date of creation: 11 Jan 2013
Date of revision:
Handle: RePEc:aah:create:2013-52
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. George Tauchen & Viktor Todorov, 2010. "Activity Signature Functions for High-Frequency Data Analysis," Working Papers 10-08, Duke University, Department of Economics.
  2. 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.
  3. Tim Bollerslev & Viktor Todorov, 2009. "Tails, Fears and Risk Premia," CREATES Research Papers 2009-26, School of Economics and Management, University of Aarhus.
  4. 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.
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