Stock Market Volatility And The Forecasting Accuracy Of Implied Volatility Indices
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 33 pages
Date of creation: Mar 2006
Date of revision:
Licensing; Implied volatility index; Out-of-sample forecasting; GARCH modelling;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-18 (All new papers)
- NEP-ETS-2006-03-18 (Econometric Time Series)
- NEP-FIN-2006-03-18 (Finance)
- NEP-FMK-2006-03-18 (Financial Markets)
- NEP-FOR-2006-03-18 (Forecasting)
- NEP-RMG-2006-03-18 (Risk Management)
- NEP-SEA-2006-03-18 (South East Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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