The implied volatility surface describes the dependence of options prices on their moneyness (volatility smiles) and maturity characteristics (volatility term structure). This paper presents an empirical study of the factors determining the implied volatility surface for equity options. The first group of factors originates from the features of the stochastic process for the price of the underlying asset. Central to the problem of option valuation is the average quadratic variation, and, more specifically, its continuous and jump components. The evolution of an underlying’s asset price is due to continuous dynamics and jump activity.
In recent years, two important developments have spurred renewed interest in the macroeconomic effects of financial frictions: global imbalances and the financial crisis of 2007-08. In the case of global imbalances, financial frictions have been invoked to account for the large and persistent capital flows from Asia to the United States and other developed economies (e.g. Caballero et al. 2008). According to this explanation, the ultimate reason behind these capital flows is that being subject to financial frictions Asian financial markets have been unable to supply the assets required to channel their high savings towards productive investment.
This paper proposes a theory in which the low-frequency movements in unemployment are explained by the low-frequency movements and the volatility of productivity growth. On the one hand, an increase in long-run productivity growth lowers long-run unemployment. On the other hand, a fall in the variance of productivity growth leads to a fall in long-run unemployment even when long-run productivity growth remains flat. The key mechanism that explains these relationships rests on the assumption that real wages, or more broadly real marginal costs, adjust more easily upward than downward.
