New Economics Papers
on Market Microstructure
Issue of 2012‒09‒03
three papers chosen by
Thanos Verousis

  1. Assessing the profitability of intraday opening range breakout strategies By Holmberg, Ulf; Lönnbark, Carl; Lundström, Christian
  2. Smile in Motion: An Intraday Analysis of Asymmetric Implied Volatility By Wallmeier, Martin
  3. Revisiting the fractional cointegrating dynamics of implied-realized volatility relation with wavelet band spectrum regression By Jozef Barunik; Michaela Barunikova

  1. By: Holmberg, Ulf (Department of Economics, Umeå University); Lönnbark, Carl (Department of Economics, Umeå University); Lundström, Christian (Department of Economics, Umeå University)
    Abstract: Is it possible to beat the market by mechanical trading rules based on historical and publicly known information? Such rules have long been used by investors and in this paper, we test the success rate of trades and profitability of the Open Range Breakout (ORB) strategy. An investor that trades on the ORB strategy seeks to identify large intraday price movements and trades only when the price moves beyond some predetermined threshold. We present an ORB strategy based on normally distributed returns to identify such days and find that our ORB trading strategy result in significantly higher returns than zero as well as an increased success rate in relation to a fair game. The characteristics of such an approach over conventional statistical tests is that it involves the joint distribution of Low, High, Open and Close over a given time horizon.
    Keywords: Bootstrap; Crude oil futures; Contraction-Expansion principle; Efficient market hypothesis; Martingales; Technical Analysis
    JEL: C49 G11 G14 G17
    Date: 2012–08–23
  2. By: Wallmeier, Martin
    Abstract: We present a new method to measure the intraday relationship between movements of implied volatility smiles and stock returns. It is based on an enhanced smile regression model which captures patterns in the intraday data which have not yet been reported in the literature. Using transaction data for exchange-traded EuroStoxx 50 options from 2000 to 2011 and DAX options from 1995 to 2011, we show that, on average, about 99% of the intraday variation of implied volatility can be explained by moneyness and changes in the index level. Compared to the typical smile regression with moneyness alone, about 50% of the remaining errors can be attributed to movements in the underlying index. We find that the intraday evolution of volatility smiles is generally not consistent with traders' rules of thumb such as the sticky strike or sticky delta rule. On average, the impact of index return on implied volatility is 1.3 to 1.5 times stronger than the sticky strike rule predicts. The main factor driving variations of this adjustment factor is the index return. Our results have implications for option valuation, hedging and the understanding of the leverage effect.
    Keywords: volatility smile; implied volatility; leverage effect; index options; highfrequency data
    JEL: G11 G14 G24
    Date: 2012–08–20
  3. By: Jozef Barunik; Michaela Barunikova
    Abstract: This paper revisits the fractional cointegrating relationship between ex-ante implied volatility and ex-post realized volatility. We argue that the concept of corridor implied volatility (CIV) should be used instead of the popular model-free option-implied volatility (MFIV) when assessing the fractional cointegrating relation as the latter may introduce bias to the estimation. For the realized volatility, we use recently proposed methods which are robust to noise as well as jumps and interestingly we find that it does not affect the implied-realized volatility relation. In addition, we develop a new tool for the estimation of fractional cointegrating relation between implied and realized volatility based on wavelets, a wavelet band least squares (WBLS). The main advantage of WBLS in comparison to other frequency domain methods is that it allows us to work conveniently with potentially non-stationary volatility due to the properties of wavelets. We study the dynamics of the relationship in the time-frequency domain with the wavelet coherence confirming that the dependence comes solely from the lower frequencies of the spectra. Motivated by this result we estimate the relationship only on this part of the spectra using WBLS and compare our results to the fully modified narrow-band least squares (FMNBLS) based on the Fourier frequencies. In the estimation, we use the S&P 500 and DAX monthly and bi-weekly option prices covering the recent financial crisis and we conclude that in the long-run, volatility inferred from the option prices using the corridor implied volatility (CIV) provides an unbiased forecast of the realized volatility.
    Date: 2012–08

This issue is ©2012 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.