Assessing the Performance of Symmetric and Asymmetric Implied Volatility Functions

Posted: 9 Jul 2008 Last revised: 16 Jan 2011

See all articles by Panayiotis C. Andreou

Panayiotis C. Andreou

Cyprus University of Technology

Christakis Charalambous

University of Cyprus - Department of Public and Business Administration

Spiros Martzoukos

University of Cyprus - Department of Public and Business Administration; George Washington University - School of Business

Date Written: December 17, 2010

Abstract

We seek to identify the best approach to model the daily implied volatility functions for pricing S&P 500 index options for the period 1996-2009. We compare the linear versus the nonlinear estimation approach, symmetric versus asymmetric model shapes with respect to the moneyness ratio, transformations of the underlying asset, and model estimation using joint datasets of calls and puts versus separating calls from puts. In-sample, we find models that are asymmetric functions of moneyness ratio work better, but out-of-sample the symmetric functions of the logarithmic transformation of the strike price are the best models. It is optimal to estimate the models nonlinearly and with the use of the joint dataset of out-of-money options instead of separating calls from puts. In contrast with other approaches that have been adopted in empirical research, the one we identify is consistent with the put-call-parity; hence, we avoid issues relating to model misspecification problems.

Keywords: Option pricing, implied volatilities, deterministic volatility functions, implied volatility functions

JEL Classification: G13, G14

Suggested Citation

Andreou, Panayiotis C. and Charalambous, Christakis and Martzoukos, Spiros Harilaos Spiridon, Assessing the Performance of Symmetric and Asymmetric Implied Volatility Functions (December 17, 2010). Available at SSRN: https://ssrn.com/abstract=1155703

Panayiotis C. Andreou (Contact Author)

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

HOME PAGE: http://www.pandreou.com

Christakis Charalambous

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
00357-2-892258 (Phone)
00357-2-339063 (Fax)

Spiros Harilaos Spiridon Martzoukos

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
357-2-892474 (Phone)
357-2-892460 (Fax)

George Washington University - School of Business

Washington, DC 20052
United States
202-994-5996 (Phone)
202-994-5014 (Fax)

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