Fixed Income Factors and the Implication's for Option Prices

Nirav Bipinchandra Vyas

Master's thesis

Abstract:

This thesis aims to investigate how fixed income factors influence the implied volatility index of the Bond Futures market, which in turn can affect option prices. The explanatory factors of the Implied Volatility Index are estimated utilizing Fixed Income Risk Factors, and their significance is evaluated utilizing the Short Condor Strategy as the benchmark option volatility strategy. Out-of-sample analyses are conducted using data from March 2014 to July 2023, which was divided into a training set and a test set, and all fixed income market factors are considered to evaluate the performance of the short condor strategy. The Light GBM Model identifies the top five fixed-income market factors based on their relative importance. The Light GBM predictions on these factors are then utilized to construct an indicator-based trading strategy. This research contributes to a greater comprehension of the impact of fixed-income factors on the Implied Volatility Index and can aid in developing more effective volatility option strategies.

Abstract:

This thesis aims to investigate how fixed income factors influence the implied volatility index of the Bond Futures market, which in turn can affect option prices. The explanatory factors of the Implied Volatility Index are estimated utilizing Fixed Income Risk Factors, and their significance is evaluated utilizing the Short Condor Strategy as the benchmark option volatility strategy. Out-of-sample analyses are conducted using data from March 2014 to July 2023, which was divided into a training set and a test set, and all fixed income market factors are considered to evaluate the performance of the short condor strategy. The Light GBM Model identifies the top five fixed-income market factors based on their relative importance. The Light GBM predictions on these factors are then utilized to construct an indicator-based trading strategy. This research contributes to a greater comprehension of the impact of fixed income factors on the Implied Volatility Index and can aid in developing more effective volatility option strategies.

Keywords

Keywords, Implied volatility index, bond futures market, option prices, fixed income risk factors, short Condor strategy, volatility strategy, Light GBM model.

Language used: English

Date on which the thesis was submitted / produced: 2. 8. 2023

Thesis defence

• Supervisor: Ing. et Ing. Vojtěch Sadil, PhD. LL.M.

Tomas Bata University in Zlín

Faculty of Management and Economics

Master programme / field:
Finance / Financial Markets and Technologies