http://dx.doi.org/10.1002/fut.21548">
 

Document Type

Journal Article

Department/Unit

Department of Finance & Decision Sciences

Title

The information content of model-free implied volatility

Language

English

Abstract

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.

Publication Date

2012

Source Publication Title

Journal of Futures Markets

Volume

32

Issue

8

Start Page

792

End Page

806

Publisher

Wiley

ISSN (print)

02707314

ISSN (electronic)

10969934

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