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The evolving dynamics of the Australian SPI 200 implied volatility surface

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  • Tanha, Hassan
  • Dempsey, Michael

Abstract

This paper is concerned with the evolutionary behaviour of implied volatility patterns, which identifies vega uncertainty. Using a principal component analysis (PCA), we compare reported results in US and European markets with our findings here for Australian markets. In this way, we seek to establish the degree to which prior findings have “universality” as opposed to being strictly the outcome of a particular market at a particular time. In a broad sense, we are able to reproduce prior findings. But there are differences. Prior studies find that prevailing shocks impact primarily uniformly across options independently of moneyness (a “parallel shift”) with a second effect (a “Z-shaped twist”) that impacts differentially in relation to the option's degree of moneyness. We find that the “parallel shift” can be interpreted as applying primarily to in-the-money (ITM) options and the Z-shaped twist to out-of-the-money (OTM) options. As a result, the overall effects are interpreted in relation to a volatility smile.

Suggested Citation

  • Tanha, Hassan & Dempsey, Michael, 2016. "The evolving dynamics of the Australian SPI 200 implied volatility surface," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 43(C), pages 44-57.
    • Handle: RePEc:eee:intfin:v:43:y:2016:i:c:p:44-57
    DOI: 10.1016/j.intfin.2016.03.006
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    References listed on IDEAS

    as
    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    2. Matthias Fengler & Wolfgang Härdle & Christophe Villa, 2003. "The Dynamics of Implied Volatilities: A Common Principal Components Approach," Review of Derivatives Research, Springer, vol. 6(3), pages 179-202, October.
    3. Chalamandaris, Georgios & Tsekrekos, Andrianos E., 2010. "Predictable dynamics in implied volatility surfaces from OTC currency options," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1175-1188, June.
    4. Bernales, Alejandro & Guidolin, Massimo, 2014. "Can we forecast the implied volatility surface dynamics of equity options? Predictability and economic value tests," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 326-342.
    5. Bernales, Alejandro & Guidolin, Massimo, 2015. "Learning to smile: Can rational learning explain predictable dynamics in the implied volatility surface?," Journal of Financial Markets, Elsevier, vol. 26(C), pages 1-37.
    6. Carr, Peter & Wu, Liuren, 2016. "Analyzing volatility risk and risk premium in option contracts: A new theory," Journal of Financial Economics, Elsevier, vol. 120(1), pages 1-20.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Implied volatility; VIX; Volatility forecasts; Informational efficiency;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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