Model-Free Volatilities

Christopher Hian-Ann Ting (Singapore Management University)
Monday, October 28, 2013 - 2:00pm
Spandauer Strasse 1, Room 23

Model-free volatilities such as VIX index have become important among practitioners and academics alike. The original formula to compute the model-free volatility requires a continuous spectrum of strike prices. However, in reality, the strike prices are discrete and limited in numbers. In this talk, we propose a new approach to compute the model-free volatility more accurately. Our results show that the current discrete method used by CBOE to compute VIX contains an upward bias, which is both statistically and economically significant. The implication is that any existing papers that use the VIX data from CBOE may lead to wrong conclusions. In addition, our proposed method allows us to construct the term structure of model-free volatilities. We find that the slope of this volatility term structure correlates positively with the market index. In this talk, we also discuss a new method to extend our continuous implementation techniques to American options on a single stock