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for instance, equities smirk because of demand for downside protection while commods skew positive because of demand for upside protection from hedgers. So I wonder whether there is a more intuitive way of thinking about sticky strike vs delta and bayesian updating makes sense
One thing I’d think would be important is degree of mean reversion in the underlier. Equities don’t have much (so sticky delta more likely to be appropriate) whereas rates are more likely to mean revert (which would make sticky strike more relevant).
Equivalently, you can’t attach any meaning to an index price level so there is no reason for any particular strike to be important. But you can attach meaning to the level of rates, which makes vol more likely to stick to rates strikes.
Though in rates you dont have “one and done”. Ie regimes change and you end up with a sticky surface post “information” (say CB annoucement). While equities bring earnings/warnings etc. Which lost info value quickly.
This makes sense – and agrees with this sketchy website: http://deltaquants.com/volatility-sticky-strike-vs-sticky-delta …. I think Bayesian updating explains this obs: mean-reverting => strong prior (i.e a new obs of spot doesn't tell you much). Strong prior => less updating => sticky strike appropriate
Why would the sensitivity of the implied volatility at fixed strikes depend on the mean-reversion of underlying?
Not an expert but eg if an index goes up 10% then you expect everything to rebase around the new level, no reason to expect reversion to the previous level so the old level ceases to matter. Another way to say it is that index level is scale free, the actual number has no meaning
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