Abstract
This study compares the information on the implied volatility surface of a stock-index with the corresponding information on the implied volatility surface of the index dividend futures. We outline an optimisation technique for comparing implied volatility estimates based on the Black-Scholes model, Black model and a model-free approach, for stock-index versus dividend-index futures. The implied volatility term-structure of stock-index consistently exceeds that of the dividend index futures thereby confirming the equity volatility puzzle under novel financial data and instruments. However, the magnitude of excess implied volatility reduces as the time-to-maturity increases, suggesting that discrepancies between the two are influenced by investment horizon, and the type of option, call or put. We also show the existence of a profitable trading rule that outperforms a benchmark buy-and-hold strategy. The GDP, dollar euro exchange rate and inflation are strong determinants of the implied volatility difference.
Original language | English |
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Article number | 104276 |
Number of pages | 16 |
Journal | Journal of Economic Dynamics and Control |
Volume | 134 |
Issue number | 104276 |
Publication status | Published - 20 Dec 2021 |
Research Groups and Themes
- AF Financial Markets
- Dividend puzzle
- Implied volatility models
- Implied volatility differences
- Index dividend futures option trading
- Trading strategies
- ECON Applied Economics
- Dividend puzzle