Are There Gains from Using Information over the Surface of Implied Volatilities?
Journal of Futures Markets (2017)
54 Pages Posted: 8 Apr 2016 Last revised: 15 Jan 2018
Date Written: December 20, 2017
We investigate the out-of-sample predictability of implied volatility using the information over the implied volatility surface. We show that implied volatility surface is useful for the out-of -sample forecast of implied volatility up to one week ahead. Trading strategies based on the predictability of implied volatility could generate significant risk-adjusted gains after controlling for transaction costs. Significant results also depend on the way of modelling implied volatility surface. We then calibrate a two-factor stochastic volatility option pricing model to implied volatility data. Results show that implied volatility is better explained by both long-term and short-term variance factors.
Keywords: implied volatility; price discovery; two-factor stochastic volatility model; out-of-sample forecast; economic significance
JEL Classification: G13; G14; G17
Suggested Citation: Suggested Citation