Dispersion Trading and Determinants of Implied Volatility:Evidence from Australia

摘要

This article analyzed and evaluated the dispersion trading strategy in the context of Australian market.Binomial option pricing framework and Black-Scholes Model were applied in this article to calculate the implied volatility of index option and constituent options.In addition,an empirical model was implemented to analyze the determinants of implied volatility.It was found that the implied volatilities ranged between 0.10 and 0.19 with higher values for European options and Call options.Implied volatility of option is related to days to maturity,trading volumes as well as the ratio of intrinsic value to current stock price.As for the implied correlation,it has an average value of 2.3,indicating the profitability of dispersion trading in Australian market.However,the trading strategy is not risk-free.It is subjective to transaction costs,model risks as well as volatility convergence conditions.