The implied volatility smirk in SPY options

Wei Guo*, Sebastian A. Gehricke, Xinfeng Ruan, Jin E. Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

We provide a comprehensive study of the implied volatility (IV) smirk in the SPDR S&P 500 Exchange-Traded Fund (SPY ETF) option market. In general, the IV curves are downward sloping with little curvature, exhibiting an almost straight line. However, the shape of the IV curves becomes more curved during the global financial crisis (GFC) period, indicating that the commonly accepted IV smirk shape is driven by the GFC. In addition, based on in-sample, out-of-sample tests and asset allocation analysis, we show that the first difference of the slope factor can predict the next month’s SPY excess returns.

Original languageEnglish
Pages (from-to)2671-2692
Number of pages22
JournalApplied Economics
Volume53
Issue number23
DOIs
Publication statusPublished - 2021
Externally publishedYes

Keywords

  • IV smirks
  • Implied volatility (IV)
  • SPY options
  • global financial crisis (GFC)
  • prediction

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