Relative Implied-Volatility Arbitrage with Index Options
Journal
The financial analysts journal
ISSN
0015-198X
ISSN-Digital
1938-3312
Type
journal article
Date Issued
2002-11-01
Author(s)
Abstract
This study investigates the efficiency of markets as to the relative pricing of similar risk by using implied volatilities of options on highly correlated indexes and a statistical arbitrage strategy to profit from potential mispricings. It first analyzes the interrelationships over time of the 3 most highly correlated and liquid pairs of US stock indexes. Based on this analysis, the paper derives a relative relationship between implied volatilities for each pair. If this relationship was violated, a relative mispricing was suspected. A simple no-arbitrage barrier was used to identify significant deviations and a statistical arbitrage trade was implemented each time such a deviation was recorded. It was found that, although many deviations can be observed, only some of them are large enough to be exploited profitably in the presence of bid-ask spreads and transaction costs.
http://www.manuel-ammann.com/pdf/PubsAmmann2002VolatilityArbitrageFAJ.pdf
http://www.manuel-ammann.com/pdf/PubsAmmann2002VolatilityArbitrageFAJ.pdf
Language
English
HSG Classification
not classified
Refereed
Yes
Publisher
National Federation of Financial Analysts Societies
Publisher place
New York
Volume
58
Number
6
Start page
42
End page
55
Pages
14
Subject(s)
Division(s)
Eprints ID
12591
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Name
PubsAmmann2002VolatilityArbitrageFAJ.pdf
Size
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Format
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