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The information content of implied volatility in light of the jump/continuous decomposition of realized volatility

✍ Scribed by Pierre Giot; Sébastien Laurent

Publisher
John Wiley and Sons
Year
2007
Tongue
English
Weight
186 KB
Volume
27
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

In the framework of encompassing regressions, the information content of the jump/continuous components of historical volatility is assessed when implied volatility is included as an additional regressor. The authors' empirical application focuses on daily and intradaily data for the S&P100 and S&P500 indexes, and daily data for the associated VXO and VIX implied volatility indexes. The results show that the total explanatory power of the encompassing regressions barely changes when the jump/continuous components are included, although the weekly and monthly continuous components are usually significant. This evidence supports the view that implied volatility has very high information content, even when extended decompositions of past realized volatility are used. Moreover, adding GARCH‐type volatility forecasts in the regressions confirms these results. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:337–359, 2007

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