Department of Finance & Decision Sciences
The information content of model-free implied volatility
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.
Source Publication Title
Journal of Futures Markets
Cheng, Xin, and Joseph K.W. Fung. "The information content of model-free implied volatility." Journal of Futures Markets 32.8 (2012): 792-806.