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

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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.
Item Type:  MPRA Paper 

Original Title:  Joint Modeling of Call and Put Implied Volatility 
Language:  English 
Keywords:  Implied Volatility, Option Markets, Multiplicative Error Models, Forecasting 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C53  Forecasting and Prediction Methods ; Simulation Methods G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  6318 
Depositing User:  Markku Lanne 
Date Deposited:  16. Dec 2007 16:22 
Last Modified:  18. Jan 2015 18:35 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/6318 