Impact of Hedging Pressure on Implied Volatility in Financial Times and London Stock Exchange (FTSE) Market
Kingdream Public Limited Company
Lincoln University (NZ)
University of Western Australia; Financial Research Network (FIRN)
The International Journal of Business and Finance Research, Vol. 3, No. 1, pp. 103-118, 2009
This paper examines the impact of net buying pressure and the event of 9/11 on the implied volatility of the U.K. FTSE 100 (Financial Times and the London Stock Exchange) index options. Our findings indicate that when effects such as financial leverage, information flow and mean reversion are held constant, the net buying pressure of the out-of-the-money put options plays a dominant role in determining the shape of the implied volatility function. Further, the event of 9/11 has a transitory influence on the implied volatility change. Our results also support the notion that hedging pressure can help explain the difference between implied volatility and realized volatility.
Number of Pages in PDF File: 16
JEL Classification: G11, G15Accepted Paper Series
Date posted: February 27, 2010
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