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Removing Maturity Dependence from Implied Volatility

Article Quant Q&A · Author: Dhruv Mahajan
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Summary

The document asks how to adjust implied volatility (IV) so that a scaled series depends less on time to expiry. The author describes one initial approach: regress IV on time to expiry (TTE), then subtract the fitted slope multiplied by TTE. They suspect better methods may exist and invite research references, while expressing a preference against complicated term-structure models.

No comparison, empirical evidence, or recommended alternative is provided, so the regression should be treated as a proposed experiment rather than a validated scaling method. The note leaves important choices unspecified, including the data, option moneyness, and how to measure residual dependence on maturity. Any adjustment would need evaluation in the intended market and use case; the document does not establish that removing a linear TTE relationship preserves useful volatility information.

Key ideas

  • The author seeks an IV adjustment that reduces its dependence on time to expiry.
  • A proposed baseline is to regress IV on TTE and subtract the fitted linear contribution.
  • The document offers no evidence that this adjustment works or outperforms alternatives.
  • It asks for references while preferring methods simpler than a full term-structure model.

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Full text
# Scaling Implied Volatility by time to maturity


# Scaling Implied Volatility by time to maturity












Reference request for any research that aims to "scale" the implied volatility by time to expiry so that the scaled IV data has minimal dependence on the time to expiry.

I tried removing the effects by running a linear regression of IV on tte and subtracting the slope*tte. I'd assume there would be better methods.

I don't prefer a complicated term structure model but any reference requests are welcome

Thanks.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.