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New Evidence on the Information Content of Implied Volatility of S&P 500: Model-Free versus Model-Based

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  • Weiwei ZHANG

    (Changchun University of Science and Technology, Changchun, China.)

  • Tiezhu SUN

    (Corresponding author. Changchun Guanghua University, Changchun, China.)

  • Yechi MA

    (School of Business, Northeast Normal University, Changchun, China.)

  • Zilong WANG

    (Department of Land Economy, University of Cambridge, Cambridge, UK.)

Abstract

This paper provides new evidence to compare the information content of model-free implied volatility (MFIV) and model-based volatility for forecasting future volatility of the S&P 500. We choose Black and Scholes (BS) implied volatility as our model-based volatility and VIX as our measure of MFIV. By using non-overlapping monthly samples from January 2004 to June 2019, we find that both BS implied volatility and MFIV are informationally efficient and subsume information contained in the historical realized volatility for forecasting future volatility. This is the first study show that BS implied volatility and MFIV contain the same information and there is no winner for forecasting future volatility. This implied that a forecast model could include both BS implied volatility and MFIV

Suggested Citation

  • Weiwei ZHANG & Tiezhu SUN & Yechi MA & Zilong WANG, 2021. "New Evidence on the Information Content of Implied Volatility of S&P 500: Model-Free versus Model-Based," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 109-121, December.
    • Handle: RePEc:rjr:romjef:v::y:2021:i:1:p:109-121
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    More about this item

    Keywords

    Implied volatility; VIX; Realized volatility; Information; Volatility forecasts; Volatility models;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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