Degree of Irrationality: Sentiment and Implied Volatility Surface

As such, indicators in the options market, such as options prices, implied volatility, and the Greeks, are seen as "smarter" compared to indicators in the securities market. Numerous studies have confirmed this perspective and have explored the discovery function of options implied volatility on securities prices. For instance, Ni et al. (2020) found that the degree of skewness in implied volatility smiles has a significant predictive ability for stock market returns, while Han and Li (2021) discovered that the difference between call and put implied volatility has significant predictive power for stock market returns. Additionally, there is more research on the predictive ability of options implied volatility on realized volatility, dating back to Latane and Rendleman (1976-05) reverse use of the BS formula to derive the implied standard deviation of options and constructing a weighted implied standard deviation (WISD) using delta-neutral weighting, which was found to predict actual volatility significantly better than methods based on historical volatility. In recent years, numerous studies have incorporated the VIX index and the HAR method proposed by Corsi (2009), achieving notable results in predicting stock market volatility Byun and Kim (2013); Zhang (2020); Wan and Tian (2023). Preprint submitted to Elsarticle May 18, 2024 However, indicators in the options market should not be treated as the gold standard.