The Information Content of Model-Free Implied Volatility

Xin Cheng, Joseph K W FUNG*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    16 Citations (Scopus)


    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.

    Original languageEnglish
    Pages (from-to)792-806
    Number of pages15
    JournalJournal of Futures Markets
    Issue number8
    Publication statusPublished - Aug 2012

    Scopus Subject Areas

    • Accounting
    • Business, Management and Accounting(all)
    • Finance
    • Economics and Econometrics


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