Intraday S&P 500 Index Predictability and Options Trading Profitability

In this paper we study the intraday dynamics of E-mini S&P 500 index futures and the option trading strategies employing the weekly E-mini S&P 500 index futures options. We make a number of contributions to the literature in the area of intra-day equity index futures return predictability and trading profitability. As far as we know till at present, ours is one of the first studies on intraday implied moments of S&P 500 index futures return using intraday option prices. We use intra-day E-mini S&P500 European-style weekly options data from August 2009 to December 2012 and improve on existing techniques to extract the first four moments of the risk-neutral futures return distribution. Secondly we perform intraday out-of-sample forecasting or prediction, and document the intraday dynamics of the risk-neutral moments. We introduce a novel local autoregression method that allows variable windows in estimating the autoregressive parameters. This is particularly useful in situations when there may be intraday news that cause structural breaks in the otherwise smooth process. It also distinguishes itself from the conventional autoregressive model with predetermined sample lengths. Thirdly, we show profitability in the options trading strategies involving the various risk-neutral moment forecasts, particularly that involving skewness. The positive profitability after transaction costs in skewness trading indicates that the market is not as efficient as thought to be at least during intraday periods. This may explain the persistence of intraday trading activities in the market. Our intraday riskneutral moments also suggest that forecast increases in volatility and skewness lead to an average increase in subsequent return over the next 10 minutes. On the other hand, intraday forecast increase in risk-neutral kurtosis leads to an average decrease in subsequent return. These intraday results appear to be contrary to existing studies using risk-neutral moments over daily intervals. This suggests that intraday price dynamics is different from daily price dynamics, and we provide an explanation of the discrepancy. ∗ Quantitative Finance, Singapore Management University † Dept. of Applied Probability and Statistics, National University of Singapore ‡ Lee Kong Chian School of Business, Singapore Management University This paper was discussed at an invited session of the Statistical Computing Asia 2015 Conference at Academia Sinica, Taipei, in July. We also acknowledge helpful comments from colleagues who have read earlier versions of the paper, including faculty participants at the National University of Singapore RMI Seminar on March 24, 2015, and at the Singapore Management University symposium on March 13, 2015. An earlier version of the paper, titled “Intra-day leads and lags between stock returns empirical moments and option implied moments” was presented at the 2013 International Institute of Forecaster’s Conference in 24-26 June, Seoul. The paper has been a top ten download at SSRN for several weeks. Corresponding author: Kian Guan Lim at Email: kgl@smu.edu. sg. Funding from the Singapore Management University OUB Chair endowment is gratefully acknowledged. Intraday S&P 500 Index Predictability Options Trading Profitability