Department of Economics and Business Economics

Torben Gustav Andersen

The fine structure of equity-index option dynamics

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  • Torben G. Andersen
  • Oleg Bondarenko, University of Chicago, Chicago, Illinois.
  • ,
  • Viktor Todorov, Northwestern University
  • ,
  • George Tauchen, Duke University

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 evolution 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 over small time scales in the risk-neutral intensity of the negative jumps in the S&P 500 index, which is the dominant component of the short-maturity out-of-the-money put implied volatility dynamics, are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility, which is the dominant component in the short-maturity at-the-money option implied volatility dynamics, are best modeled as Gaussian with occasional jumps.

Original languageEnglish
JournalJournal of Econometrics
Pages (from-to)532-546
Number of pages15
Publication statusPublished - 1 Aug 2015

    Research areas

  • High-frequency data, Implied volatility, Jump activity, KolmogorovSmirnov test, Stable process, Stochastic volatility, VIX index

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