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Smile in Motion: An Intraday Analysis of Asymmetric Implied Volatility

Algorithmic Finance (2015), 4:1-2, 89-104

17 Pages Posted: 15 Mar 2012 Last revised: 28 Jul 2015

Martin Wallmeier

University of Fribourg - Faculty of Economics and Social Science

Date Written: May 1, 2015

Abstract

We present a new method to measure the intraday relationship between movements of implied volatility smiles and stock index returns. It exploits a specific characteristic of the smile profile in high-frequency data. Using transaction data for EuroStoxx 50 options from 2000 to 2011 and DAX options from 1995 to 2011 (14 million transactions), we find that the intraday evolution of volatility smiles is generally not consistent with traders' rules of thumb such as the sticky strike or sticky delta rule. On average, the impact of index return on implied volatility is 1.3 to 1.5 times stronger than the sticky strike rule predicts. The main factor driving variations of the adjustment factor is the index return. Our results have implications for option valuation, hedging and the understanding of the leverage effect.

Keywords: Volatility smile, implied volatility, leverage effect, index options, high-frequency data

JEL Classification: G11, G14, G24

Suggested Citation

Wallmeier, Martin, Smile in Motion: An Intraday Analysis of Asymmetric Implied Volatility (May 1, 2015). Algorithmic Finance (2015), 4:1-2, 89-104 . Available at SSRN: https://ssrn.com/abstract=2022261 or http://dx.doi.org/10.2139/ssrn.2022261

Martin Wallmeier (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland
+41 26 300 8294 (Phone)

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