Information Content in Sneer Asymmetry: An Application to OOS Implied Volatility Forecasting

Abstract

The ad hoc Black-Scholes (AHBS) model is one of the most widely used option valuation models among practitioners models. The main contribution of this study is methodological. We have two main results: (1) we make the empirical observation that typically the call and put sneers are discontinuous and have different slopes when moneyness is equal to 1, and (2) we propose a new data usage methodology that incorporates the information contained in the symmetric response of the call and put sneers and henceforth provides more accurate out-of-sample forecasts for several time period ahead prices. Our results are robust across several dimensions, including: time period, forecast horizon, moneyness, and model specification.

Keywords: Ad Hoc Black-Scholes (AHBS), asymmetric volatility sneer, data usage, implied volatility

JEL Classification: G12, G13, G14, G15, F3, C22, C53, D82