The information content of option implied volatility surrounding the 1997 Hong Kong stock market crash

Joseph K W FUNG*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    23 Citations (Scopus)

    Abstract

    This study examines the information conveyed by options and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The author determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other leading indicator candidates. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, nonoverlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The study also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility. These results indicate that the options market is highly efficient informationally.

    Original languageEnglish
    Pages (from-to)555-574
    Number of pages20
    JournalJournal of Futures Markets
    Volume27
    Issue number6
    DOIs
    Publication statusPublished - Jun 2007

    Scopus Subject Areas

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

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