Modelling the MIB30 implied volatility surface. Does market efficiency matter?

Gianluca Cassesse and Massimo Guidolin

No 2005-008, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We analyze the volatility surface vs. moneyness and time to expiration implied by MIBO options written on the MIB30, the most important Italian stock index. We specify and fit a number of models of the implied volatility surface and find that it has a rich and interesting structure that strongly departs from a constant volatility, Black-Scholes benchmark. This result is robust to alternative econometric approaches, including generalized least squares approaches that take into account both the panel structure of the data and the likely presence of heteroskedasticity and serial correlation in the random disturbances. Finally we show that the degree of pricing efficiency of this options market can strongly condition the results of the econometric analysis and therefore our understanding of the pricing mechanism underlying observed MIBO option prices. Applications to value-at-risk and portfolio choice calculations illustrate the importance of using arbitrage-free data only.

Keywords: Assets (Accounting); Prices (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fin and nep-rmg
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Citations: View citations in EconPapers (3)

Published in International Review of Financial Analysis, 2006, 15(2), pp. 145-78

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