Implied volatility smile dynamics in the presence of jumps

TL;DR

This paper investigates how implied volatility smiles behave around jumps using high-frequency intra-day option data, revealing abnormal properties in smile dynamics during jump events across different maturities and option types.

Contribution

It provides a high-frequency analysis of implied volatility smile dynamics around jumps, utilizing principal components and statistical measures to identify abnormal behaviors.

Findings

Volatility smiles exhibit abnormal properties around jumps.

Changes in smile dynamics are consistent regardless of maturity.

Jump scenarios show distinct statistical patterns in smile behavior.

Abstract

The main purpose of this work is to examine the behavior of the implied volatility smiles around jumps, contributing to the literature with a high-frequency analysis of the smile dynamics based on intra-day option data. From our high-frequency SPX S\&P500 index option dataset, we utilize the first three principal components to characterize the implied volatility smile and analyze its dynamics by the distribution of the scores' means and variances and other statistics for the first hour of the day, in scenarios where jumps are detected and not. Our analyses clearly suggest that changes in the volatility smiles have abnormal properties around jumps compared with the absence of jumps, regardless of maturity and type of the option.