Munich Personal RePEc Archive

Joint Modeling of Call and Put Implied Volatility

Ahoniemi, Katja and Lanne, Markku (2007): Joint Modeling of Call and Put Implied Volatility. Published in:

[img]
Preview
PDF
MPRA_paper_6318.pdf

Download (717Kb) | Preview

Abstract

This paper exploits the fact that implied volatilities calculated from identical call and put options have often been empirically found to differ, although they should be equal in theory. We propose a new bivariate mixture multiplicative error model and show that it is a good fit to Nikkei 225 index call and put option implied volatility (IV). A good model fit requires two mixture components in the model, allowing for different mean equations and error distributions for calmer and more volatile days. Forecast evaluation indicates that in addition to jointly modeling the time series of call and put IV, cross effects should be added to the model: putside implied volatility helps forecast callside IV, and vice versa. Impulse response functions show that the IV derived from put options recovers faster from shocks, and the effect of shocks lasts for up to six weeks.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.