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Stock Market Volatility And The Forecasting Accuracy Of Implied Volatility Indices

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Author Info
Kazuhiko NISHINA (Graduate School of Economics, Osaka University)
Tatsuro Nabil MAGHREBI () (Faculty of Economics, Wakayama University)
Moo-Sung KIM (College of Business Administration, Pusan National University)
Abstract

This study develops a new model-free benchmark of implied volatility for the Japanese stock market similar in construction to the new VIX based on the S&P 500 index. It also examines the stochastic dynamics of the implied volatility index and its relationship with realized volatility in both markets. There is evidence that implied volatility is governed by a long-memory process. Despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. The implied volatility index is also found to be inclusive of some but not all information on future volatility contained in historical returns. However, its higher out-of sample performance provides further support to the rationale behind drawing inference about future stock market volatility based on the incremental information contained in options prices.

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Publisher Info
Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 06-09.

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Length: 33 pages
Date of creation: Mar 2006
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Handle: RePEc:osk:wpaper:0609

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Web page: http://www.econ.osaka-u.ac.jp/
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Related research
Keywords: Licensing; Implied volatility index; Out-of-sample forecasting; GARCH modelling;

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Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  1. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November. [Downloadable!] (restricted)
  2. Yacine Ait-Sahalia & Andrew W. Lo, 1995. "Nonparametric Estimation of State-Price Densities Implicit in Financial Asset Prices," NBER Working Papers 5351, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Ball, Clifford A. & Roma, Antonio, 1994. "Stochastic Volatility Option Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 589-607, December. [Downloadable!]
  4. Corrado, Charles J. & Miller, Thomas Jr., 1996. "A note on a simple, accurate formula to compute implied standard deviations," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 595-603, April. [Downloadable!] (restricted)
  5. Chambers, Donald R & Nawalkha, Sanjay K, 2001. "An Improved Approach to Computing Implied Volatility," The Financial Review, Eastern Finance Association, vol. 36(3), pages 89-99, August.
  6. Amin, Kaushik I & Ng, Victor K, 1997. "Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 333-67.
  7. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility1," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November. [Downloadable!] (restricted)
  8. Canina, Linda & Figlewski, Stephen, 1993. "The Informational Content of Implied Volatility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(3), pages 659-81. [Downloadable!] (restricted)
  9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
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