The Information Content of Model-Free Implied Volatility

Xin Cheng, Joseph K W FUNG*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)792-806
Number of pages15
JournalJournal of Futures Markets
Volume32
Issue number8
DOIs
Publication statusPublished - Aug 2012

Scopus Subject Areas

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

Fingerprint

Dive into the research topics of 'The Information Content of Model-Free Implied Volatility'. Together they form a unique fingerprint.

Cite this