Forecasting the implied volatility surface dynamics of equity options

In this paper we examine the predictability of implied volatility surface dynamics of equity options. In particular, we are focused on studying the predictive performances of models that include implied volatility surface dynamics of S&P500 index options and historical VIX Term Structure information. We find that models incorporating these variables in the form of exogenous autoregressive elements are outperformed in terms of prediction error and forecast accuracy measures by more parsimonious models—such as random walk.