Regimes of Volatility: Some observations on the variation of S&P 500 implied volatilities

by Emanuel Derman of Goldman Sachs

January 1999

Summary: Since the 1987 stock market crash, the S&P 500 index options market has displayed a persistent implied volatility skew.

How should the skew vary as markets move? There are a variety of apocryphal rules and theoretical models, each leading to different predictions.

In this report I examine more than a year's worth of S&P 500 implied volatilities, qualitatively isolating several distinct periods in which different patterns of change seem to hold. For each period, I try to determine which rule or model the volatility market seems to be following, the possible reason why, and whether the change in volatility is appropriate.

Published in: RISK, Vol. 12, No. 4, (April 1999), pp. 55-59.

Download paper (2,464K PDF) 30 pages

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