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The Dynamics of the S&P 500 Implied Volatility Surface

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Abstract

This empirical study is motivated by the literature on “smile-consistent” arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified under a variety of criteria. Subsequently, we develop a “Procrustes” type rotation in order to interpret the retained components. The results have implications for both option pricing and hedging and for the economics of option pricing.

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Authors and Affiliations

  1. Athens Derivatives Exchange Research and Development Group, Greece

    George Skiadopoulos (Associate Research Fellow)

  2. Financial Options Research Centre, Chrisanthemon 76, N. Iraklio, 14121, Athens, Greece

    George Skiadopoulos (Associate Research Fellow) & Les Clewlow

  3. Warwick Business School, University of Warwick, Coventry, CV4 7AL, UK

    Stewart Hodges (Director of the Financial Options Research Centre)

Authors
  1. George Skiadopoulos
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  2. Stewart Hodges
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  3. Les Clewlow
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Skiadopoulos, G., Hodges, S. & Clewlow, L. The Dynamics of the S&P 500 Implied Volatility Surface. Review of Derivatives Research 3, 263–282 (2000). https://doi.org/10.1023/A:1009642705121

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