Susan Thomas, Rohini Grover
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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. |