Affiliations: Department of Finance and Accounting, University of Fribourg, Switzerland
Corresponding author: Martin Wallmeier, Department of Finance and Accounting, University of Fribourg/Switzerland, Bd. de Pérolles 90, CH-1700, Fribourg, Switzerland. Tel.: +41 26 300 8294; Fax: +91 044 222 511 51; E-mail: [email protected]
Abstract: We present a new method to measure the intraday relationship between movements of implied volatility smiles and stock index returns. It exploits a specific characteristic of the smile profile in high-frequency data. Using transaction data for EuroStoxx 50 options from 2000 to 2011 and DAX options from 1995 to 2011 (14 million transactions), we find that the intraday evolution of volatility smiles is generally not consistent with traders' rules of thumb such as the sticky strike or sticky delta rule. On average, the impact of index return on implied volatility is 1.3 to 1.5 times stronger than the sticky strike rule predicts. The main factor driving variations of the adjustment factor is the index return. Our results have implications for option valuation, hedging and the understanding of the leverage effect.
Keywords: G11, G14, G24
Keywords: Volatility smile, implied volatility, leverage effect, index options, high-frequency data