Determinants of Implied Volatility Smiles - An Empirical Analysis Using Intraday DAX Equity Options

Abstract

By extending and reviewing determinants of the implied volatility in the context of high frequency (HF) trade-by-trade DAX equity options from the EUREX a mean-reversion autocorrelation process is revealed, besides confirming low frequency results such as moneyness, time, liquidity, volume and underlying moment dependencies. Furthermore, we show, that the mean-reversion process is present, even if we control for fluctuating trades between bid and ask prices. It is induced by algorithmic market making and market microstructure effects. We address the HF research gap in market microstructure literature expressed by O’Hara (2015), who argues that markets and trading is radically different today, which consequently altered the basic constructs of market microstructure, and we give additional explanation for the flickering quote hypothesis of Hasbrouck and Saar (2009).

Keywords: Implied Volatilty Smile, Market Microstructure, Order Book, Buyer-/ Seller-Motivated Trades, Flickering Quotes

JEL Classification: G10, G12, G14, G17