The Fine Structure of Equity-Index Option Dynamics

33 Pages Posted: 8 Nov 2013 Last revised: 10 Oct 2015

See all articles by Torben G. Andersen

Torben G. Andersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Aarhus University - CREATES

Oleg Bondarenko

University of Illinois at Chicago - Department of Finance

Viktor Todorov

Northwestern University

George Tauchen

Duke University - Economics Group

Date Written: July 28, 2014

Abstract

We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the evolution of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations over small time scales in the risk-neutral intensity of the negative jumps in the S&P 500 index, which is the dominant component of the short-maturity out-of-the-money put implied volatility dynamics, are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility, which is the dominant component in the short-maturity at-the-money option implied volatility dynamics, are best modeled as Gaussian with occasional jumps.

Keywords: high-frequency data, implied volatility, jump activity, Kolmogorov-Smirnov test, stable process, stochastic volatility, VIX index

JEL Classification: C51, C52, G12

Suggested Citation

Andersen, Torben G. and Bondarenko, Oleg and Todorov, Viktor and Tauchen, George E., The Fine Structure of Equity-Index Option Dynamics (July 28, 2014). Journal of Econometrics, Vol. 187, pp. 532-546, 2015. Available at SSRN: https://ssrn.com/abstract=2350997 or http://dx.doi.org/10.2139/ssrn.2350997

Torben G. Andersen

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Oleg Bondarenko (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 996-2362 (Phone)
(312) 413-7948 (Fax)

Viktor Todorov

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

George E. Tauchen

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

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