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The Telescoping Overlap Problem in Options Data

42 Pages Posted: 20 Dec 2001  

Charlotte Strunk Hansen

Platinum Grove Asset Management L.P.

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business

Bent Jesper Christensen

Aarhus University; Aarhus University; Aarhus University

Date Written: December 15, 2001

Abstract

In analyzing the relation between implied and realized volatility, researchers confront samples that have a high degree of overlap, which "telescopes" as option maturities are reached. With volatility samples of this nature, we show that the regression coefficients are disperse even in the limit, the t-statistics diverge, the Durbin-Watson statistic converges to zero, and the regression R2 converges to a positive random variable in the limit. We develop an alternative asymptotic theory that accounts for both the high degree of overlap and its telescoping nature, and illustrate it empirically with an application to S&P 100 (OEX) index options. Our theory reconciles the seemingly contradictory results from overlapping and non-overlapping samples, and suggests that option markets aggregate volatility information efficiently, as suggested by the (statistically consistent) results from non-overlapping samples.

Notes: Previously titled: Accounting for the Overlapping Data Problem in the Implied - Realized Volatility Regression

Keywords: Implied volatility; S&P 100 index options; Market efficiency; Overlapping data

JEL Classification: C15, C22, C53, G13, G14

Suggested Citation

Hansen, Charlotte Strunk and Prabhala, Nagpurnanand and Christensen, Bent Jesper, The Telescoping Overlap Problem in Options Data (December 15, 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=276311 or http://dx.doi.org/10.2139/ssrn.276311

Charlotte Strunk Hansen (Contact Author)

Platinum Grove Asset Management L.P. ( email )

Reckson Executive Park, Building 4
1100 King Street
Rye Brook, NY 10573

Nagpurnanand Prabhala

University of Maryland - Robert H. Smith School of Business ( email )

4427 Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2165 (Phone)
301-405-0359 (Fax)

Bent Jesper Christensen

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

Aarhus University ( email )

Fuglesangs Alle 4
DK-8210 Aarhus V, 8210
Denmark

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