Degree of Irrationality: Sentiment and Implied Volatility Surface

• URL: http://arxiv.org/abs/2405.11730v1
• Date: Mon, 20 May 2024 02:24:36 GMT
• Title: Degree of Irrationality: Sentiment and Implied Volatility Surface
• Authors: Jiahao Weng, Yan Xie,
• Abstract summary: We constructed daily high-frequency sentiment data and used the VAR method to predict implied volatility surface. We found that high-frequency sentiment had a stronger correlation with at-the-money (ATM) options' implied volatility. We demonstrated that incorporating this sentiment information can improve the accuracy of implied volatility surface predictions.
• Score: 0.276240219662896
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: In this study, we constructed daily high-frequency sentiment data and used the VAR method to attempt to predict the next day's implied volatility surface. We utilized 630,000 text data entries from the East Money Stock Forum from 2014 to 2023 and employed deep learning methods such as BERT and LSTM to build daily market sentiment indicators. By applying FFT and EMD methods for sentiment decomposition, we found that high-frequency sentiment had a stronger correlation with at-the-money (ATM) options' implied volatility, while low-frequency sentiment was more strongly correlated with deep out-of-the-money (DOTM) options' implied volatility. Further analysis revealed that the shape of the implied volatility surface contains richer market sentiment information beyond just market panic. We demonstrated that incorporating this sentiment information can improve the accuracy of implied volatility surface predictions.

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