The Implied Volatility Term Structure of Stock Index Options
40 Pages Posted: 28 Mar 2011
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: Suggested Citation
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