Term Structure Analysis of Option Implied Volatility in the Brazilian Market
Applied Mathematical Sciences, Forthcoming
14 Pages Posted: 8 Mar 2017
Date Written: March 4, 2017
This paper aims at predicting the volatility term structure of a given asset. The model is based on the GARCH modeling of the asset's volatility, from which the term structure is derived. We test if the model is able to accommodate the term structure response to volatility shocks. Using data from two important Brazilian companies, the model indeed improved standard predictions for the volatility term structure by relating the size of the volatility shock to the maturity of the option used to estimate the asset's volatility.
Keywords: Volatility term structure, Volatility shocks, Brazilian options market
JEL Classification: C02, G15, G17
Suggested Citation: Suggested Citation