Implied volatility dynamics among exchange-traded funds and their largest component stocks

Timothy A. Krause, Donald Lien

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The authors implement a new model for time-variation in implied volatilities and the correlations among them to look for common factors both at the aggregate market level and also within industries. The securities under consideration are ETFs and the largest of their component stocks. Krause and Lien find strong evidence of both market and industry factors in individual stock implied volatilities, with the latter being about one-third the size of the former and mean-reverting more quickly. They then explore how the amount of volatility spillover from the ETF to its components is influenced by option trading volume and the relative importance of the individual stock in the ETF portfolio.

Original languageEnglish (US)
Pages (from-to)7-26
Number of pages20
JournalJournal of Derivatives
Volume22
Issue number1
DOIs
StatePublished - Sep 1 2014

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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