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After the 1987 crash, the S&P500 index implied volatility changed from nearly flat to negatively sloped. According to Rubinstein the Black-Scholes model was not so wrong when applied to the S&P500 before 1986-87.

I am wondering if there are still indexes or stocks around the world that present almost flat implied volatility. I have the feeling this should be true in emerging countries where the risk of crash is lower (no electronic-trading, less globalization of exchanges and thus less systematic risk) but I did not find any evidences online yet.

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For a less theoretical/academic answer, if you have a Bloomberg terminal, you can use the option scanner to look for options with implied vols that are flat across the term structure. If not BBG, perhaps some retail scanner platforms allow the same functionality. –  strimp099 Aug 30 '12 at 12:31

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up vote 4 down vote accepted

Options on almost all Korean equities today present flat implied volatility, as well as options on some Japanese equities, especially in 60-90 days maturity.

Here how the smile looks for T&D Holdings (ISIN:JP3539220008):

enter image description here

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Wow. Thanks a lot ! –  vanna Sep 11 '12 at 21:42

The negative slope is not just because people think there is going to be a crash, it is also just function of supply and demand on options:

  • Many investors want to buy protection on their portfolio, and there is no natural seller so it's the speculator who end up taking that side of the bet, but obviously only if there is a sufficient premium
  • with low interest rate, people have less money to spend when they do capital guaranteed structures, so whenever they buy puts they will usually also sell calls to cheapen the total option price. This again will create extra supply

Besides, the thing about lack of automated trading in some emerging markets might be true, but that might not necessarily mean reduced crash risk.

One of the reasons that the vol of an index goes up when the index goes down is that people just trade all the constituents without much discrimination, which pushes the correlation up, hence the vol of the index. That might actually be worse when performed manually by humans than when done by machines which could potentially correct for imbalances between shares (i.e. sell bad ones and refrain from selling good ones).

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