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The fine structure of equity-index option dynamics

Publication ,  Journal Article
Andersen, TG; Bondarenko, O; Todorov, V; Tauchen, G
Published in: Journal of Econometrics
August 1, 2015

We analyze the high-frequency dynamics of S&P 500 equity-index option prices by constructing an assortment of implied volatility measures. This allows us to infer the underlying fine structure behind the innovations in the latent state variables driving the evolution of the volatility surface. In particular, we focus attention on implied volatilities covering a wide range of moneyness (strike/underlying stock price), which load differentially on the different latent state variables. We conduct a similar analysis for high-frequency observations on the VIX volatility index as well as on futures written on it. We find that the innovations over small time scales in the risk-neutral intensity of the negative jumps in the S&P 500 index, which is the dominant component of the short-maturity out-of-the-money put implied volatility dynamics, are best described via non-Gaussian shocks, i.e., jumps. On the other hand, the innovations over small time scales of the diffusive volatility, which is the dominant component in the short-maturity at-the-money option implied volatility dynamics, are best modeled as Gaussian with occasional jumps.

Duke Scholars

Published In

Journal of Econometrics

DOI

EISSN

1872-6895

ISSN

0304-4076

Publication Date

August 1, 2015

Volume

187

Issue

2

Start / End Page

532 / 546

Related Subject Headings

  • Econometrics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics
 

Citation

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ICMJE
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Andersen, T. G., Bondarenko, O., Todorov, V., & Tauchen, G. (2015). The fine structure of equity-index option dynamics. Journal of Econometrics, 187(2), 532–546. https://doi.org/10.1016/j.jeconom.2015.02.037
Andersen, T. G., O. Bondarenko, V. Todorov, and G. Tauchen. “The fine structure of equity-index option dynamics.” Journal of Econometrics 187, no. 2 (August 1, 2015): 532–46. https://doi.org/10.1016/j.jeconom.2015.02.037.
Andersen TG, Bondarenko O, Todorov V, Tauchen G. The fine structure of equity-index option dynamics. Journal of Econometrics. 2015 Aug 1;187(2):532–46.
Andersen, T. G., et al. “The fine structure of equity-index option dynamics.” Journal of Econometrics, vol. 187, no. 2, Aug. 2015, pp. 532–46. Scopus, doi:10.1016/j.jeconom.2015.02.037.
Andersen TG, Bondarenko O, Todorov V, Tauchen G. The fine structure of equity-index option dynamics. Journal of Econometrics. 2015 Aug 1;187(2):532–546.
Journal cover image

Published In

Journal of Econometrics

DOI

EISSN

1872-6895

ISSN

0304-4076

Publication Date

August 1, 2015

Volume

187

Issue

2

Start / End Page

532 / 546

Related Subject Headings

  • Econometrics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics