IDEAS home Printed from https://ideas.repec.org/p/mod/wcefin/09122.html
   My bibliography  Save this paper

The skew pattern of implied volatility in the DAX index options market

Author

Listed:
  • Silvia Muzzioli

    ()

Abstract

The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type, and to compare option-based forecasts with historical volatility in order to see if they subsume all the information contained in historical volatility. The different information content of implied volatility is examined for the most liquid at-the-money and out-of-the-money options: put (call) options for strikes below (above) the current underlying asset price, i.e. the ones that are usually used as inputs for the computation of the smile function. In particular, since at-the-money implied volatilities are usually inserted in the smile function by computing some average of both call and put implied ones, we investigate the performance of a weighted average of at-the-money call and put implied volatilities with weights proportional to trading volume. Two hypotheses are tested: unbiasedness and efficiency of the different volatility forecasts. The investigation is pursued in the Dax index options market, by using synchronous prices matched in a one-minute interval. It was found that the information content of implied volatility has a humped shape, with out-of-the-money options being less informative than at-the-money ones. Overall, the best forecast is at-the-money put implied volatility: it is unbiased (after a constant adjustment) and efficient, in that it subsumes all the information contained in historical volatility.

Suggested Citation

  • Silvia Muzzioli, 2009. "The skew pattern of implied volatility in the DAX index options market," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 09122, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
  • Handle: RePEc:mod:wcefin:09122
    as

    Download full text from publisher

    File URL: http://www.cefin.unimore.it/sites/default/files/CefinWP20.pdf
    Download Restriction: no

    Other versions of this item:

    More about this item

    Keywords

    Implied Volatility; Volatility Smile; Volatility forecasting; Option type;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mod:wcefin:09122. 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: (Giuseppe Marotta) or (Rebekah McClure). General contact details of provider: http://edirc.repec.org/data/demodit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.