Option-Implied Information: What's the Vol Surface Got to Do With It?

32 Pages Posted: 11 Jun 2018 Last revised: 25 Jan 2019

See all articles by Maxim Ulrich

Maxim Ulrich

Karlsruhe Institute of Technology

Simon Walther

Karlsruhe Institute of Technology

Date Written: November 14, 2018

Abstract

We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to systematic biases, especially for out-of-the-money put options. To overcome this problem we propose a volatility surface that is built with a one-dimensional kernel regression. We assess its statistical accuracy relative to existing state-of-the-art parametric, semi- and non-parametric volatility surfaces by means of leave-one-out cross-validation. Based on 14 years of end-of-day and intraday S&P 500 and Euro Stoxx 50 option data we conclude that the proposed one-dimensional kernel regression represents option market information more accurately than existing approaches of the literature.

Keywords: option-implied, risk-neutral variance, risk-neutral density, tail risk, option standardization, interpolation, performance measurement

JEL Classification: G13, G17, C14

Suggested Citation

Ulrich, Maxim and Walther, Simon, Option-Implied Information: What's the Vol Surface Got to Do With It? (November 14, 2018). Available at SSRN: https://ssrn.com/abstract=3184767 or http://dx.doi.org/10.2139/ssrn.3184767

Maxim Ulrich

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden W├╝rttemberg 76131
Germany
+4972160844270 (Phone)

HOME PAGE: http://risk.fbv.kit.edu/c-ram

Simon Walther (Contact Author)

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden W├╝rttemberg 76131
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
182
Abstract Views
909
rank
166,813
PlumX Metrics