Department of Economics and Business Economics

Torben Gustav Andersen

The Fine Structure of Equity-Index Option Dynamics

Research output: Working paperResearch

Documents

  • rp13_52

    Submitted manuscript, 965 KB, PDF document

  • Torben G. Andersen
  • Oleg Bondarenko, University of Illinois at Chicago, United States
  • Viktor Todorov, Northwestern University, United States
  • George Tauchen, Duke University, United States
We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the movements of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations in the risk-neutral intensity of the negative jumps in the S&P 500 index over small time scales are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility are best modeled as Gaussian with occasional jumps.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages32
Publication statusPublished - 30 Dec 2013
SeriesCREATES Research Papers
Number2013-52

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