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The Model-Free Implied Volatility and Its Information Content

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  • George J. Jiang
  • Yisong S. Tian

Abstract

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor's 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black--Scholes (B--S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility. Copyright 2005, Oxford University Press.

Suggested Citation

  • George J. Jiang & Yisong S. Tian, 2005. "The Model-Free Implied Volatility and Its Information Content," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1305-1342.
    • Handle: RePEc:oup:rfinst:v:18:y:2005:i:4:p:1305-1342
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    File URL: http://hdl.handle.net/10.1093/rfs/hhi027
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