The Implied Volatility Term Structure of Stock Index Options

40 Pages Posted: 28 Mar 2011

See all articles by Scott Mixon

Scott Mixon

Commodity Futures Trading Commission

Date Written: August 1, 2005

Abstract

This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indexes. The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short-dated implied volatility, although not to the extent predicted by the expectations hypothesis. The low forecast power is consistent with the failure to control for a risk premium in option prices. Evidence is presented that a time varying risk premium proportional to the level of market volatility is consistent with the results.

Keywords: implied volatility, volatility term structure, expectations hypothesis, volatility risk premium

JEL Classification: G13

Suggested Citation

Mixon, Scott, The Implied Volatility Term Structure of Stock Index Options (August 1, 2005). Journal of Empirical Finance, Vol. 14, No. 3, 2007, Available at SSRN: https://ssrn.com/abstract=1796822

Scott Mixon (Contact Author)

Commodity Futures Trading Commission ( email )

1155 21st Street NW
Washington, DC 20581
United States

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