Stock return dynamics, option volume, and the information content of implied volatility

✍ Scribed by Stewart Mayhew; Chris Stivers

• Publisher: John Wiley and Sons
• Year: 2003
• Tongue: English
• Weight: 192 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10084

✦ Synopsis

Abstract

This article reports new empirical results on the information content of implied volatility, with respect to
modeling and forecasting the volatility of individual firm returns. The 50 firms with the highest option volume
on the Chicago Board Options Exchange between 1988 and 1995 are examined. First, the results indicate that the
ability of implied volatility to subsume all relevant information about conditional variance depends on option
trading volume. For the most active options in the sample, implied volatility reliably outperforms GARCH and
subsumes all information in return shocks beyond the first lag. For these active options, implied volatility
performs substantially better than indicated by the prior results of Lamoureux and Lastrapes (1993), despite significant methodological improvements in the time‐series
volatility models in this study including the use of high‐frequency intraday return shocks. For the lower
option‐volume firms in the sample, the performance of implied volatility deteriorates relative to
time‐series volatility models. Finally, compared to a time‐series approach, the implied volatility
of equity index options provides reliable incremental information about future firm‐level volatility.
© 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:615–646, 2003