Three-point volatility smile classificationEvidence from the Warsow Stock Exchange during volatile summer 2011

  1. García Machado, Juan José
  2. Rybczynski, Jaroslaw
Investigaciones europeas de dirección y economía de la empresa

ISSN: 1135-2523

Year of publication: 2015

Volume: 21

Issue: 1

Pages: 17-25

Type: Article

DOI: 10.1016/J.IEDEE.2013.09.005 DIALNET GOOGLE SCHOLAR lock_openDialnet editor

More publications in: Investigaciones europeas de dirección y economía de la empresa


This paper studies the behavior of the smile in the Warsaw Stock Exchange (WSE) during the volatile summer of 2011.We investigate the volatility smile derived from liquid call and put options on the Polish WIG20 index which option series expired on September 2011. In this period, the polish index has dropped about 20% in two weeks time. By linear interpolation, implied volatilities for moneyness points needed were calculated, then we construct 355 smile curves for calls and puts options to study and make some kind of smile-types classification. We propose seventeen types-smiles which represent all possible cases of three points (three moneynesses) graphical patterns. This classification is made basing upon relationship higher/equal/lower values of implied volatility for each of three points. Furthermore, we distinguish the convexity of pattern. We can note that smiles, smirks and ups are convex in shape, while reversed ones and downs are concave functions.

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