Title: Optimisation of trading strategies based on implied volatility and implied dividend volatility
Authors: Enoch Nii Boi Quaye - University of Kent (United Kingdom) [presenting]
Radu Tunaru - University of Kent (United Kingdom)
Abstract: The aim is to compare information on implied volatility surface of stock-index to the corresponding implied volatility surface of index dividend futures on the stock index. We outline a computational procedure for aggregating implied volatility estimates based on the Black-Scholes, Black model and the model-free approach. Our findings illustrate how implied volatility term-structure of STOXX 50 with time-to-maturity exceeding 9-months moves enough to be justified by subsequent dividend fluctuations. Options with maturities between 1-9 months lead to implied volatilities that move too much to be justified by forward looking changes in dividends. The implied volatility term-structure of stock consistently exceeds that of index dividend futures thereby confirming Shiller's dividend puzzle under novel financial data and instruments. However, the magnitude of excess implied volatility declines with long-dated time-to-maturity, suggesting that discrepancies between the two are influenced by investment horizon. In addition, we design a set of trading strategies using implied volatility and the ratio of implied volatilities as a trading signal that prove to be successful for STOXX50 equity space.