✦ LIBER ✦

The Information Content of Model-Free Implied Volatility

✍ Scribed by Xin Cheng; Joseph K.W. Fung

Publisher: John Wiley and Sons
Year: 2012
Tongue: English
Weight: 543 KB
Volume: 32
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.21548

No coin nor oath required. For personal study only.

✦ Synopsis

This study examines the information content of model‐free implied volatility (MFIV) estimates with respect to the options and futures markets in Hong Kong. In this study, the volatility forecasting performance of MFIV is compared, using different prediction horizons, to IV estimates based on Black's futures option pricing model (BIV) and time‐series forecasts based on historical volatility (TS‐HV). The results show that the BIV prediction is unbiased for different horizon forecasts. MFIV outperforms TS‐HV forecasts and, most importantly, BIV subsumes the information content of both MFIV and TS‐HV forecasts. The results are largely maintained for next‐day forecasts but the forecasting quality of the two IV measures declines as expiration day approaches. The information contents of MFIV and TS‐HV forecasts are complementary. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:792‐806, 2012

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