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

27 Pages Posted: 25 Nov 2012

See all articles by Youngsoo Choi

Youngsoo Choi

Hankuk University of Foreign Studies

Steven J. Jordan

Econometric Solutions

Wonchang Lee

Hi Investment & Securities Co, Ltd

Date Written: November 24, 2012

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

Suggested Citation

Choi, Youngsoo and Jordan, Steven J. and Lee, Wonchang, Information Content in Sneer Asymmetry: An Application to OOS Implied Volatility Forecasting (November 24, 2012). Available at SSRN: https://ssrn.com/abstract=2180379 or http://dx.doi.org/10.2139/ssrn.2180379

Youngsoo Choi

Hankuk University of Foreign Studies ( email )

89 Wangsan-ri, Mohyeon-myeon, Cheoin-gu
Yongin-shi, Kyonggi-do 449-791
Korea, Republic of (South Korea)

Steven J. Jordan (Contact Author)

Econometric Solutions ( email )

3520 Fossil Park Dr.
Fort Worth, TX NA 76137
United States

Wonchang Lee

Hi Investment & Securities Co, Ltd ( email )

25-15, Youido-dong
Youngdeungpo-gu
Seoul, 150-878
Korea, Republic of (South Korea)

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