We are grateful to Abhisar Srivastava, Tirthankar Patnaik, and the National Stock Exchange of India Ltd. for the data used in this study. We thank Nidhi Aggarwal, Ajay Shah, Rajat Tayal, and the participants of the IGIDR Finance Research Seminars for useful discussions. We also thank our discussant Prof. Moon, Seong Ju, and participants of the 7th Annual APAD Conference for useful suggestions. The views expressed in this study belong to the authors and not their employer.
Liquidity Considerations in Estimating Implied Volatility
Version of Record online: 10 FEB 2012
© 2012 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 32, Issue 8, pages 714–741, August 2012
How to Cite
Grover, R. and Thomas, S. (2012), Liquidity Considerations in Estimating Implied Volatility. J. Fut. Mark., 32: 714–741. doi: 10.1002/fut.21543
- Issue online: 1 JUN 2012
- Version of Record online: 10 FEB 2012
- Manuscript Accepted: 3 NOV 2011
- Manuscript Received: 31 OCT 2011
Option markets have significant variation in liquidity across different option series. Illiquidity reduces the informativeness of the price. Price information for illiquid options is more noisy, and thus the implied volatilities (IVs) based on these prices are more noisy. In this study, we propose weighting schemes to estimate IV, which reduce the importance attached to illiquid options. The two indexes using liquidity weights are SVIX, which is a spread-adjusted volatility index, and TVVIX, which is a traded volume weighted VIX. We find SVIX outperforms TVVIX, the conventional schemes such as the traditional VXO, or vega weights, and volatility elasticity weights. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:714-742, 2012