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Modelling the MIB30 implied volatility surface. Does market efficiency matter?

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  • Gianluca Cassesse
  • Massimo Guidolin

Abstract

We analyze the volatility surface vs. moneyness and time to expiration implied by MIBO options written on the MIB30, the most important Italian stock index. We specify and fit a number of models of the implied volatility surface and find that it has a rich and interesting structure that strongly departs from a constant volatility, Black-Scholes benchmark. This result is robust to alternative econometric approaches, including generalized least squares approaches that take into account both the panel structure of the data and the likely presence of heteroskedasticity and serial correlation in the random disturbances. Finally we show that the degree of pricing efficiency of this options market can strongly condition the results of the econometric analysis and therefore our understanding of the pricing mechanism underlying observed MIBO option prices. Applications to value-at-risk and portfolio choice calculations illustrate the importance of using arbitrage-free data only.

Suggested Citation

  • Gianluca Cassesse & Massimo Guidolin, 2005. "Modelling the MIB30 implied volatility surface. Does market efficiency matter?," Working Papers 2005-008, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2005-008
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    Cited by:

    1. Francesco Audrino & Dominik Colagelo, 2007. "Forecasting Implied Volatility Surfaces," University of St. Gallen Department of Economics working paper series 2007 2007-42, Department of Economics, University of St. Gallen.
    2. Borovkova, Svetlana & Permana, Ferry J., 2009. "Implied volatility in oil markets," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2022-2039, April.
    3. Amine Bouden, 2008. "The Behavior Of The Implied Volatility Surface: Evidence From Crude Oil Futures Options," World Scientific Book Chapters, in: Mondher Bellalah & Jean-Luc Prigent & Jean-Michel Sahut & Georges Pariente & Olivier Levyne & Michel (ed.), Risk Management And Value Valuation and Asset Pricing, chapter 8, pages 151-175, World Scientific Publishing Co. Pte. Ltd..

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