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Option-implied information: What’s the vol surface got to do with it?

Ulrich, M.; Walther, S.

We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to systematic biases, especially for out-of-the-money put options. Estimates for risk-neutral variance differ across volatility surfaces by more than 10% on average, leading to variance risk premium estimates that differ by 60% on average. The variations are even larger for risk-neutral skewness. To overcome this problem, we propose a volatility surface that is built with a one-dimensional kernel regression. We assess its statistical accuracy relative to existing state-of-the-art parametric, semi- and non-parametric volatility surfaces by means of leave-one-out cross-validation, including the volatility surface of OptionMetrics. Based on 14 years of end-of-day and intraday S&P 500 and Euro Stoxx 50 option data we conclude that the proposed one-dimensional kernel regression represents option market information more accurately than existing approaches of the literature.

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Verlagsausgabe §
DOI: 10.5445/IR/1000119622
Veröffentlicht am 17.07.2020
Cover der Publikation
Zugehörige Institution(en) am KIT Institut für Finanzwirtschaft, Banken und Versicherungen (FBV)
Publikationstyp Zeitschriftenaufsatz
Publikationsjahr 2020
Sprache Englisch
Identifikator ISSN: 1380-6645, 1573-7144
KITopen-ID: 1000119622
Erschienen in Review of derivatives research
Verlag Springer
Vorab online veröffentlicht am 07.05.2020
Schlagwörter Option-implied, Risk-neutral variance, Risk-neutral density, Tail risk, Option standardization, Interpolation
Nachgewiesen in Scopus
Web of Science
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