NDLI: Option Market (In)efficiency and Implied Volatility Dynamics After Return Jumps

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Option Market (In)efficiency and Implied Volatility Dynamics After Return Jumps

Content Provider	Scilit
Author	Kanniainen, Juho Magris, Martin
Copyright Year	2018
Description	Journal: SSRN Electronic Journal In informationally efficient financial markets, option prices and this implied volatility should immediately be adjusted to new information that arrives along with a jump in underlying's return, whereas gradual changes in implied volatility would indicate market inefficiency. Using minute-by-minute data on S&P 500 index options, we provide evidence regarding delayed and gradual movements in implied volatility after the arrival of return jumps. These movements are directed and persistent, especially in the case of negative return jumps. Our results are significant when the implied volatilities are extracted from at-the-money options and out-of-the-money puts, while the implied volatility obtained from out-of-the-money calls converges to its new level immediately rather than gradually. Thus, our analysis reveals that the implied volatility smile is adjusted to jumps in underlying's return asymmetrically. Finally, it would be possible to have statistical arbitrage in zero-transaction-cost option markets, but under actual option price spreads, our results do not imply abnormal option returns.
Related Links	http://arxiv.org/pdf/1810.12200 https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=3252394
ISSN	10914358
e-ISSN	15565068
DOI	10.2139/ssrn.3252394
Journal	SSRN Electronic Journal
Language	English
Publisher	Elsevier BV
Publisher Date	2018-09-20
Access Restriction	Open
Subject Keyword	Journal: SSRN Electronic Journal Return Jumps Implied Volatility Market Efficiency Option Markets Principal Component Analysis
Content Type	Text
Resource Type	Article
Subject	Public Health, Environmental and Occupational Health Psychiatry and Mental Health

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