Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface*

Abstract

Recent evidence suggests that the parameters characterizing the implied volatility surface (IVS) in option prices are unstable. We study whether the resulting predictability patterns may be exploited. In a first stage we model the surface along cross‐sectional moneyness and maturity dimensions. In a second stage we model the dynamics of the first‐stage coefficients. We find that the movements of the S&P 500 IVS are highly predictable. Whereas profitable delta‐hedged positions can be set up under selective trading rules, profits disappear when we increase transaction costs and trade on wide segments of the IVS.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 118 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.