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Factors explaining movements in the implied volatility surface

✍ Scribed by Scott Mixon

Publisher
John Wiley and Sons
Year
2002
Tongue
English
Weight
211 KB
Volume
22
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This article explores the relationship of changes in the S&P 500 index implied volatility surface to
economic state variables. Observable variables can explain some of the variation in implied volatility, with the
majority of explanatory power from index returns. Although the contemporaneous return is most important for
explaining changes in short dated volatility, the path of the index is important for explaining changes in long
dated volatility. Other variables also display statistically significant relations to volatility changes. Shocks
to the Nikkei 225, short‐term interest rates, and the corporate/government bond yield spread are
correlated with small, systematic changes in implied volatility. The results suggest a multifactor model for
market volatility, with factors other than index returns adding negligible explanatory ability. © 2002 Wiley
Periodicals, Inc. Jrl Fut Mark 22:915–937, 2002

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