The stock implied volatility and the implied dividend volatility

Quaye, Enoch and Tunaru, Radu (2021) The stock implied volatility and the implied dividend volatility. Journal of Economic Dynamics and Control. a104276 1-36. ISSN 0165-1889

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Abstract

This study compares the information on the implied volatility surface of a stock-index with the corresponding information on the implied volatility surface of the index dividend futures. We outline an optimisation technique for comparing implied volatility estimates based on the Black-Scholes model, Black model and a model-free approach, for stock-index versus dividend-index futures. The implied volatility term-structure of stock-index consistently exceeds that of the dividend index futures thereby confirming the equity volatility puzzle under novel financial data and instruments. However, the magnitude of excess implied volatility reduces as the time-to-maturity increases, suggesting that discrepancies between the two are influenced by investment horizon, and the type of option, call or put. We also show the existence of a profitable trading rule that outperforms a benchmark buy-and-hold strategy. The GDP, dollar euro exchange rate and inflation are strong determinants of the implied volatility difference.

Item Type: Article
Keywords: Dividend puzzle, Implied volatility models, Index dividend futures option trading, Trading strategies
Schools and Departments: University of Sussex Business School > Accounting and Finance
SWORD Depositor: Mx Elements Account
Depositing User: Mx Elements Account
Date Deposited: 13 Dec 2021 08:14
Last Modified: 13 Dec 2021 08:15
URI: http://sro.sussex.ac.uk/id/eprint/103337

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