Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?

Does Net Buying Pressure Affect the Shape of Implied Volatility Functions? ABSTRACT This paper examines the relation between net buying pressure and the shape of the implied volatility function (IVF) for index and individual stock options. We find that changes in implied volatility are directly related to net buying pressure from public order flow. We also find that changes in implied volatility of S&P 500 options are most strongly affected by buying pressure for index puts, while changes in implied volatility of stock options are dominated by call option demand. Simulated delta‐neutral option‐writing trading strategies generate abnormal returns that match the deviations of the IVFs above realized historical return volatilities. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?

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Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.2004.00647.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper examines the relation between net buying pressure and the shape of the implied volatility function (IVF) for index and individual stock options. We find that changes in implied volatility are directly related to net buying pressure from public order flow. We also find that changes in implied volatility of S&P 500 options are most strongly affected by buying pressure for index puts, while changes in implied volatility of stock options are dominated by call option demand. Simulated delta‐neutral option‐writing trading strategies generate abnormal returns that match the deviations of the IVFs above realized historical return volatilities.

Journal

The Journal of FinanceWiley

Published: Apr 1, 2004

References

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