Volume 14 | Issue 2 | Article 2
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The Impact of Net Buying Pressure on Implied Volatilities Observed from SPI Futures Options
In this paper, we examine the impact of buying pressure on changes in implied volatilities from put and call options written on index futures contracts. We find evidence that buying pressure is related to changes in implied volatilities for at-the-money options. This result is consistent with Shleifer and Vishny's (1997) limits to arbitrage hypothesis which suggests that implied volatilities increase temporarily as buying pressure moves traders away from optimal portfolio positions. Further supporting this hypothesis is the strong negative relationship that we observe between current and lagged changes in implied volatility. We also report that consistent with Black's (1976b) leverage effect, changes in implied volatility are negatively related to changes in the value of the underlying index.
