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Type: Journal article
Title: Implied volatility smiles, option mispricing and net buying pressure: evidence around the global financial crisis
Author: Larkin, J.
Brooksby, A.
Lin, C.
Zurbrugg, R.
Citation: Accounting and Finance, 2012; 52(1):47-69
Publisher: Blackwell Publishing
Issue Date: 2012
ISSN: 0810-5391
Statement of
J. Larkin, A. Brooksby, C.T. Lin and R. Zurbruegg
Abstract: Using the recent global financial crisis as an exogenous setting, we examine the presence and source of implied volatility smile phenomena in Australian S&P ASX 200 index options. We find a pronounced implied volatility smile for index puts in both bull and bear markets and a smile for index calls in the bear but not bull market. Implied volatilities of out-of-the money puts tend to be upwards biased whilst those of calls tend to be downwards biased. We also find that the bias in implied volatilities yields excess returns based on unhedged and delta-neutral trading strategies, suggesting that implied volatilities are related to option mispricing. Net buying pressure from market participants appears to be a source of mispricing in the case of out-of-the-money index puts with excess demand particularly pronounced during the bull period before the global financial crisis unfolded.
Keywords: Implied volatility smile; option pricing; net buying pressure
Rights: © 2011 The Authors. Accounting and Finance © 2011 AFAANZ
RMID: 0020119083
DOI: 10.1111/j.1467-629X.2011.00419.x
Appears in Collections:Business School publications

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