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The skew pattern of implied volatility in the DAX index options market

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  • Silvia Muzzioli

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Abstract

The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type and to compare the latter option based forecasts with historical volatility in order to see if they subsume all the information contained in the latter. We run a horse race of different implied volatility estimates: at the money and out of the money call and put implied volatilities and average implied that is a weighted average of at the money call and put implied volatilities with weights proportional to trading volume. Two hypotheses are tested: unbiasedness and efficiency of the different volatility forecasts. The investigation is pursued in the Dax index options market, by using synchronous prices matched in a one minute interval. The results highlight that the information content of implied volatility has a humped shape, with out of the money options being less informative than at the money ones. Overall, the best forecast is at the money put implied volatility: it is unbiased (after a constant adjustment) and efficient, in that it subsumes all the information contained in historical volatility.

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Bibliographic Info

Paper provided by University of Modena and Reggio E., Faculty of Economics "Marco Biagi" in its series Department of Economics with number 0617.

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Length: pages 21
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:mod:depeco:0617

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Keywords: implied Volatility; volatility Smile; volatility forecasting; option type;

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  1. Mark Britten-Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, 04.
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  13. Silvia Muzzioli, 2009. "The skew pattern of implied volatility in the DAX index options market," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 09122, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
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  16. Becker, Ralf & Clements, Adam E. & White, Scott I., 2007. "Does implied volatility provide any information beyond that captured in model-based volatility forecasts?," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2535-2549, August.
  17. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
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  19. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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Cited by:
  1. Silvia Muzzioli, 2009. "The skew pattern of implied volatility in the DAX index options market," Department of Economics 0617, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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