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Liquidity Considerations in Estimating Implied Volatility
Author(s) -
Grover Rohini,
Thomas Susan
Publication year - 2012
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21543
Subject(s) - market liquidity , econometrics , volatility (finance) , implied volatility , economics , weighting , volatility smile , monetary economics , medicine , radiology
Option markets have significant variation in liquidity across different option series. Illiquidity reduces the informativeness of the price. Price information for illiquid options is more noisy, and thus the implied volatilities ( IV s) based on these prices are more noisy. In this study, we propose weighting schemes to estimate IV , which reduce the importance attached to illiquid options. The two indexes using liquidity weights are SVIX , which is a spread‐adjusted volatility index, and TVVIX , which is a traded volume weighted VIX . We find SVIX outperforms TVVIX , the conventional schemes such as the traditional VXO , or vega weights, and volatility elasticity weights. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:714‐742, 2012