The Dynamics of the S&P 500 Implied Volatility Surface
Posted: 27 Mar 2000
Abstract
This empirical study is motivated by the literature on "smile-consistent" arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified under a variety of criteria. Subsequently, we develop a "Procrustes" type rotation in order to interpret the retained components. The results have implications for both option pricing and hedging and for the economics of option pricing.
JEL Classification: G13
Suggested Citation: Suggested Citation
Skiadopoulos, George S. and Hodges, Stewart D. and Clewlow, Les, The Dynamics of the S&P 500 Implied Volatility Surface. Review of Derivatives Research, Vol. 3, No. 3, 1999. Available at SSRN: https://ssrn.com/abstract=217388
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