An Empirical Study of the Dynamics of Implied Volatility Indices: International Evidence

21 Pages Posted: 9 May 2015

Date Written: May 8, 2015

Abstract

This paper compares the empirical performance of continuous time models for the dynamics of nine different implied volatility indices. The models include linear, quadratic and nonlinear drift specifications with affine, constant elasticity of variance (CEV) and stochastic elasticity of variance (SEV) diffusion parts. We find that a nonlinear drift specification is important when imposing an affine structure on the diffusion, whereas a simple linear drift is adequate with a CEV and SEV specification, of which the SEV is dominant. For all but two of the indices we investigate, the best specification is a SEV diffusion with linear drift. For gold and the USD/EUR exchange rate there is little difference between a CEV and SEV diffusion with linear drift.

Keywords: Continuous time, Implied volatility dynamics, Affine, CEV, SEV

JEL Classification: C13, C16, C51, C52, G13

Suggested Citation

Huskaj, Bujar and Larsson, Karl, An Empirical Study of the Dynamics of Implied Volatility Indices: International Evidence (May 8, 2015). Available at SSRN: https://ssrn.com/abstract=2603996 or http://dx.doi.org/10.2139/ssrn.2603996

Bujar Huskaj (Contact Author)

Lund University ( email )

SE-220 07 Lund
Sweden
+46 (0)46 222 95 49 (Phone)

Karl Larsson

Örebro University ( email )

Fakultetsgatan 1
SE-701 82
Örebro, 70210
Sweden

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