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Title:Expectations Hypothesis of the Term Structure of Implied Volatility: Re-examination
Author(s):Byoun, Soku; Kwok, Chuck C.Y.; Park, Hun Y.
Subject(s):at-the-money options
Abstract:Previous studies have tested the expectations hypothesis of the term structure of implied volatility using xed-interval time-series of at-the-money options. We show, using a stochastic volatility option pricing model, that even the implied volatilities of at-the-money options are not necessarily unbiased and that the xed-interval time-series can produce misleading results. We then suggest an alternative approach and test the expectations hypothesis using S&P 500 stock index options. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline.
Issue Date:1999-09
Publisher:Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report:OFOR Working Paper Series, no. 99-06
Genre:Working / Discussion Paper
Publication Status:published or submitted for publication
Peer Reviewed:not peer reviewed
Date Available in IDEALS:2008-03-17

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