Expectations Hypothesis of the Term Structure of Implied Volatility: Re-examination

Byoun, Soku; Kwok, Chuck C.Y.; Park, Hun Y.

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https://hdl.handle.net/2142/4023 Copy

Description

Title

Expectations Hypothesis of the Term Structure of Implied Volatility: Re-examination

Author(s)

• Byoun, Soku
• Kwok, Chuck C.Y.
• Park, Hun Y.

Issue Date

1999-09

Keyword(s)

at-the-money options

Abstract

Previous studies have tested the expectations hypothesis of the term structure of implied volatility using xed-interval time-series of at-the-money options. We show, using a stochastic volatility option pricing model, that even the implied volatilities of at-the-money options are not necessarily unbiased and that the xed-interval time-series can produce misleading results. We then suggest an alternative approach and test the expectations hypothesis using S&P 500 stock index options. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline.

Publisher

Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign

Series/Report Name or Number

OFOR Working Paper Series, no. 99-06

Type of Resource

text

Language

en

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http://hdl.handle.net/2142/4023

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