Asymmetric Responses of Volatility to Market Changes and Volatility Smile of Options in Thailand Futures Exchange
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Published:
Jul 30, 2019
Keywords:
asymmetric responses, volatility smile, implied volatility, moneyness
Main Article Content
Abstract
This paper studied the asymmetric responses of volatility to market changes and the volatility smile of options in the Thailand Future Exchange (TFEX) by studying the relationship between realized volatility and implied volatility of SET50 Index Option. Furthermore, this paper studied the patterns of volatility surface in each moneyness of options. The results found the volatility smiles indicating that implied volatility of in-the-money call option showed upward trend. On the contrary, implied volatility of out-of-the-money call option showed less tentative compare with in-the-money option, due to downward slope characteristic. Furthermore, volatility surface for each moneyness has different shape depended on its response of implied volatility to moneyness and to time to maturity.
Article Details
How to Cite
Bungswang, C., Lonkani, R., & Khunaprasit, W. (2019). Asymmetric Responses of Volatility to Market Changes and Volatility Smile of Options in Thailand Futures Exchange. WMS Journal of Management, 8(3), 50–62. Retrieved from https://so06.tci-thaijo.org/index.php/wms/article/view/206458
Section
Research Articles-Academic Articles
References
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Chang, E. C., Ren, J., & Shi, Q. (2009). Effects of the volatility smile on exchange settlement practices: The Hong Kong case. Journal of Banking & Finance, 33(1), 98-112.
Chargoy-Corona, J., & Ibarra-Valdez, C. (2006). A note on Black–Scholes implied volatility. Physica A: Statistical Mechanics and its Applications, 370(2), 681-688.
Chen, C. H., Chung, H., & Yuan, S. F. (2014). Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market. Journal of Futures Markets, 34(12), 1122-1145.
Chen, C. Y. H., & Kuo, I. D. (2014). Investor sentiment and Interest rate volatility smile: evidence from Eurodollar options markets. Review of Quantitative Finance and Accounting, 43(2), 367-391.
Christensen, B. J., & Prabhala, N. R. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125-150.
Corrado, C. J., & Miller, T. W. (2006). Estimating expected excess returns using historical and option‐implied volatility. Journal of Financial Research, 29(1), 95-112.
Derman, E. (2003). Laughter in the Dark – The Problem of the Volatility Smile. Retrieved from http://www.emanuelderman.com/ media/euronext-volatility_smile.pdf
Feng, S., Zhang, Y., & Friesen, G. C. (2015). The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs. International Review of Financial Analysis, 41, 62-73.
Fleming, J. (1998). The quality of market volatility forecasts implied by S&P 100 index option prices. Journal of empirical finance, 5(4), 317-345.
Ganti A. (2016). Implied Volatility - IV. Retrieved from http://www.investopedia.com/ terms/i/iv.asp
Golembiovsky, D., & Baryshnikov, I. (2006). Volatility smile at the Russian option market. Journal of Business Economics and Management, 7(1), 9-15.
Hull, J. C. (2012). The Black–Scholes–Merton model. In Options, futures, and other derivatives (8th ed.), 303-307. Boston: Pearson Education.
Kohler, J. (n.d). Implied Volatility: Buy Low And Sell High. Retrieve from http://www.investopedia.com/articles/optioninvestor/08/implied-volatility.asp
Kolb, R. W., & Overdahl, J. A. (2007). European option pricing. In Futures, options, and swap (5th ed.), 449-456. Malden, MA: Blackwell publishing.
Kuo, I. D. (2011). Pricing and hedging volatility smile under multifactor interest rate models. Review of Quantitative Finance and Accounting, 36(1), 83-104.
Leemakdej, A. (2013). Lak kānlongthun læ pō̜ngkan khwāmsīang dūai trāsān ʻanuphan thāng kānngœ̄n [Principles of investment and hedging with financial derivatives] (2nd ed.). Bangkok, Thailand: The Stock Exchange of Thailand.
Manowattanakul, R. & Boonvorachote, T. (2015). kān pramān khwām phanphūan khō̜ng laksap ʻāngʻing phư̄a pramœ̄n mūnlakhā khō̜nʻō̜pchan thī mī saphāp khlō̜ng nō̜i [Volatility Estimation of Underlying Assets or Valuing Low Liquidity Call Options]. Kasetsart Journal (Soc. Sci), 36, 244-257.
Mayhew, S., & Stivers, C. (2003). Stock return dynamics, option volume, and the information content of implied volatility. Journal of Futures Markets, 23(7), 615-646.
Maverick, J. B. (2015). How does implied volatility impact the pricing of options?. Retrieved from https://www.investopedia.com/ ask/answers/062415/how-does-implied-volatility-impact-pricing-options.asp
Meissner, G., & Kawano, N. (2001). Capturing the volatility smile of options on high-tech stocks—A combined GARCH-neural network approach. Journal of economics and finance, 25(3), 276-292.
Mixon, S. (2009). Option markets and implied volatility: Past versus present. Journal of Financial Economics, 94(2), 171-191.
Nordén, L. (2003). Asymmetric option price distribution and bid–ask quotes: consequences for implied volatility smiles. Journal of Multinational Financial Management, 13(4), 423-441.
Parameswaran, S. K. (2011). Options on stock indices, foreign currencies, futures contracts, and volatility indices .In Futures and options: concepts and applications, 449-450. Singapore: McGraw-Hill.
Patakkinang, T., Thongsupan, L., Chalakarn, S., & Tharavanij, P. (2012). khrōngsāng khwām phanphūan rūp rō̜i yim (Volatility Smile) læ khwāmsāmāt nai kān ʻathibāi læ kān khāt kān khwām phanphūan thī kœ̄t khưn čhing khō̜ng phontō̜pthǣn datchanī SET hāsip dōi khwām phanphūan fǣng ( Implied Volatility ) thī dai čhāk SET hāsip Option [Volatility Smile and Forecasting Performance of Implied Volatility from SET50 Option]. NIDA Development Journal, 52(3), 25-60.
Sabbatini, M., & Linton, O. (1998). A GARCH model of the implied volatility of the Swiss market index from option prices. International Journal of Forecasting, 14(2), 199-213.
Singh, V. K. (2013). Modeling volatility smile: Empirical evidence from India. Journal of Derivatives & Hedge Funds, 19(3), 208-240
.
Szu, W. M., Wang, M. C., & Yang, W. R. (2011). The determinants of exchange settlement practices and the implication of volatility smile: Evidence from the Taiwan Futures Exchange. International Review of Economics & Finance, 20(4), 826-838.
Tanha, H., & Dempsey, M. (2015). The asymmetric response of volatility to market changes and the volatility smile: Evidence from Australian options. Research in International Business and Finance, 34, 164-176.
Vagnani, G. (2009). The Black–Scholes model as a determinant of the implied volatility smile: A simulation study. Journal of Economic Behavior & Organization, 72(1), 103-118.
Vähämaa, S. (2004). Delta hedging with the smile. Financial Markets and Portfolio Management, 18(3), 241-255.
Vohra, N. D., & Bagri, B. R. (2003). Valuation of options. In Futures and options (2nd ed.). 84-231. New Delhi, India: Tata McGraw-Hill.
Vohra, N. D., & Bagri, B. R. (2003). Options on stock indices, and futures options. In Futures and options (2nd ed,). 238-249. New Delhi: Tata McGraw-Hill.
Volatility Smile and Volatility (2008). Web log post. Retrieved from http://optionstradingbeginner.blogspot.com/2008/05/volatility-smile-and-volatility-skew.htm
Wang, Y. H., & Wang, Y. Y. (2015). The Information Content of Intraday Implied Volatility for Volatility Forecasting. Journal of Forecasting, 35, 167-178.
Wilmott, P. (2006). The Black–Scholes model. In Paul Wilmott on quantitative finance (2nd ed.).Vol.1,91-99. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). The Black–Scholes formulae and the greeks. In Paul Wilmott on quantitative finance, (2nd ed.).Vol. 1,109-136. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Simple generalizations of the Black-Scholes world. In Paul Wilmott on quantitative finance (2nd ed.). Vol. 1,139-150. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Overview of volatility modeling. In Paul Wilmott on quantitative finance (2nd ed.).Vol. 3, 813-830. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Deterministic volatility surface. In Paul Wilmott on quantitative finance (2nd ed.), Vol.3 ,333-849. Chichester, England: John Wiley & Sons.
Chang, E. C., Ren, J., & Shi, Q. (2009). Effects of the volatility smile on exchange settlement practices: The Hong Kong case. Journal of Banking & Finance, 33(1), 98-112.
Chargoy-Corona, J., & Ibarra-Valdez, C. (2006). A note on Black–Scholes implied volatility. Physica A: Statistical Mechanics and its Applications, 370(2), 681-688.
Chen, C. H., Chung, H., & Yuan, S. F. (2014). Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market. Journal of Futures Markets, 34(12), 1122-1145.
Chen, C. Y. H., & Kuo, I. D. (2014). Investor sentiment and Interest rate volatility smile: evidence from Eurodollar options markets. Review of Quantitative Finance and Accounting, 43(2), 367-391.
Christensen, B. J., & Prabhala, N. R. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125-150.
Corrado, C. J., & Miller, T. W. (2006). Estimating expected excess returns using historical and option‐implied volatility. Journal of Financial Research, 29(1), 95-112.
Derman, E. (2003). Laughter in the Dark – The Problem of the Volatility Smile. Retrieved from http://www.emanuelderman.com/ media/euronext-volatility_smile.pdf
Feng, S., Zhang, Y., & Friesen, G. C. (2015). The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs. International Review of Financial Analysis, 41, 62-73.
Fleming, J. (1998). The quality of market volatility forecasts implied by S&P 100 index option prices. Journal of empirical finance, 5(4), 317-345.
Ganti A. (2016). Implied Volatility - IV. Retrieved from http://www.investopedia.com/ terms/i/iv.asp
Golembiovsky, D., & Baryshnikov, I. (2006). Volatility smile at the Russian option market. Journal of Business Economics and Management, 7(1), 9-15.
Hull, J. C. (2012). The Black–Scholes–Merton model. In Options, futures, and other derivatives (8th ed.), 303-307. Boston: Pearson Education.
Kohler, J. (n.d). Implied Volatility: Buy Low And Sell High. Retrieve from http://www.investopedia.com/articles/optioninvestor/08/implied-volatility.asp
Kolb, R. W., & Overdahl, J. A. (2007). European option pricing. In Futures, options, and swap (5th ed.), 449-456. Malden, MA: Blackwell publishing.
Kuo, I. D. (2011). Pricing and hedging volatility smile under multifactor interest rate models. Review of Quantitative Finance and Accounting, 36(1), 83-104.
Leemakdej, A. (2013). Lak kānlongthun læ pō̜ngkan khwāmsīang dūai trāsān ʻanuphan thāng kānngœ̄n [Principles of investment and hedging with financial derivatives] (2nd ed.). Bangkok, Thailand: The Stock Exchange of Thailand.
Manowattanakul, R. & Boonvorachote, T. (2015). kān pramān khwām phanphūan khō̜ng laksap ʻāngʻing phư̄a pramœ̄n mūnlakhā khō̜nʻō̜pchan thī mī saphāp khlō̜ng nō̜i [Volatility Estimation of Underlying Assets or Valuing Low Liquidity Call Options]. Kasetsart Journal (Soc. Sci), 36, 244-257.
Mayhew, S., & Stivers, C. (2003). Stock return dynamics, option volume, and the information content of implied volatility. Journal of Futures Markets, 23(7), 615-646.
Maverick, J. B. (2015). How does implied volatility impact the pricing of options?. Retrieved from https://www.investopedia.com/ ask/answers/062415/how-does-implied-volatility-impact-pricing-options.asp
Meissner, G., & Kawano, N. (2001). Capturing the volatility smile of options on high-tech stocks—A combined GARCH-neural network approach. Journal of economics and finance, 25(3), 276-292.
Mixon, S. (2009). Option markets and implied volatility: Past versus present. Journal of Financial Economics, 94(2), 171-191.
Nordén, L. (2003). Asymmetric option price distribution and bid–ask quotes: consequences for implied volatility smiles. Journal of Multinational Financial Management, 13(4), 423-441.
Parameswaran, S. K. (2011). Options on stock indices, foreign currencies, futures contracts, and volatility indices .In Futures and options: concepts and applications, 449-450. Singapore: McGraw-Hill.
Patakkinang, T., Thongsupan, L., Chalakarn, S., & Tharavanij, P. (2012). khrōngsāng khwām phanphūan rūp rō̜i yim (Volatility Smile) læ khwāmsāmāt nai kān ʻathibāi læ kān khāt kān khwām phanphūan thī kœ̄t khưn čhing khō̜ng phontō̜pthǣn datchanī SET hāsip dōi khwām phanphūan fǣng ( Implied Volatility ) thī dai čhāk SET hāsip Option [Volatility Smile and Forecasting Performance of Implied Volatility from SET50 Option]. NIDA Development Journal, 52(3), 25-60.
Sabbatini, M., & Linton, O. (1998). A GARCH model of the implied volatility of the Swiss market index from option prices. International Journal of Forecasting, 14(2), 199-213.
Singh, V. K. (2013). Modeling volatility smile: Empirical evidence from India. Journal of Derivatives & Hedge Funds, 19(3), 208-240
.
Szu, W. M., Wang, M. C., & Yang, W. R. (2011). The determinants of exchange settlement practices and the implication of volatility smile: Evidence from the Taiwan Futures Exchange. International Review of Economics & Finance, 20(4), 826-838.
Tanha, H., & Dempsey, M. (2015). The asymmetric response of volatility to market changes and the volatility smile: Evidence from Australian options. Research in International Business and Finance, 34, 164-176.
Vagnani, G. (2009). The Black–Scholes model as a determinant of the implied volatility smile: A simulation study. Journal of Economic Behavior & Organization, 72(1), 103-118.
Vähämaa, S. (2004). Delta hedging with the smile. Financial Markets and Portfolio Management, 18(3), 241-255.
Vohra, N. D., & Bagri, B. R. (2003). Valuation of options. In Futures and options (2nd ed.). 84-231. New Delhi, India: Tata McGraw-Hill.
Vohra, N. D., & Bagri, B. R. (2003). Options on stock indices, and futures options. In Futures and options (2nd ed,). 238-249. New Delhi: Tata McGraw-Hill.
Volatility Smile and Volatility (2008). Web log post. Retrieved from http://optionstradingbeginner.blogspot.com/2008/05/volatility-smile-and-volatility-skew.htm
Wang, Y. H., & Wang, Y. Y. (2015). The Information Content of Intraday Implied Volatility for Volatility Forecasting. Journal of Forecasting, 35, 167-178.
Wilmott, P. (2006). The Black–Scholes model. In Paul Wilmott on quantitative finance (2nd ed.).Vol.1,91-99. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). The Black–Scholes formulae and the greeks. In Paul Wilmott on quantitative finance, (2nd ed.).Vol. 1,109-136. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Simple generalizations of the Black-Scholes world. In Paul Wilmott on quantitative finance (2nd ed.). Vol. 1,139-150. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Overview of volatility modeling. In Paul Wilmott on quantitative finance (2nd ed.).Vol. 3, 813-830. Chichester, England: John Wiley & Sons.
Wilmott, P. (2006). Deterministic volatility surface. In Paul Wilmott on quantitative finance (2nd ed.), Vol.3 ,333-849. Chichester, England: John Wiley & Sons.