Modelling the Implied Volatility Surface: Does Market Efficiency Matter?


We analyze the volatility surface vs. moneyness and time to expiration implied by MIBO options written on the MIB30, the most important Italian stock index. We specify and fit a few models for the implied volatility surface and find that it has a rich and interesting structure that strongly departs from a constant volatility, Black-Scholes benchmark. This result is robust to a few alternative econometric approaches, including generalized least square approaches that take into account both the panel structure of the available data and the likely presence of heteroskedasticity and serial correlation in the random disturbances. Finally we show that the degree of pricing efficiency of this options market can strongly condition the results of the econometric analysis and therefore our understanding of the pricing mechanism underlying observed MIBO option prices. Applications to value-at-risk and portfolio choice calculations illustrate the importance of using arbitrage-free data only. ∗We wish to thank Alberto di Stefano from BSI (Banca della Svizzera Italiana) who has made available the dataset on which this paper work is based. †Correspondence to: Massimo Guidolin, Department of Economics, 118 Rouss Hall, University of Virginia, Charlottesville, VA 22903, USA. Tel: 434-924-7654; Fax: 434-982-2904; e-mail:

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@inproceedings{Cassese2003ModellingTI, title={Modelling the Implied Volatility Surface: Does Market Efficiency Matter?}, author={Gianluca Cassese and Massimo Guidolin}, year={2003} }