Performance Persistence and Implied Volatility Smile. Evidence from the S&P 500 Stock Index Options

This article examines performance persistence of the S&P 500 stock index options from the period 2010 to 2022. Performance persistence in the investment literature was a major area of investigation for academics, investors and practitioners for more than 3 decades. This is the first study that provides a detailed analysis of performance persistence using data from the Chicago board options exchange, CBOE, derivative market. We show the existence of the implied volatility smile of the S&P stock index options by comparing historical in relation to implied volatility. There is significant time variation in the implied volatility smile and the traditional Black – Scholes model can not explain this deviation. A possible explanation of the volatility smile is the interaction theory between arbitrageurs and noise traders. Deep in or out of the money contract has higher implied volatility than historical volatility. The only period that returns have fallen is during the recent COVID-19 pandemic that has created a recessionary market environment for the stock index options market. We found strong evidence of performance persistence in the stock index options market over the one and three year periods. The results are mixed for both winners and losers. The findings are interesting for academics, investors and practitioners in terms whether there is performance persistence and for how long