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Why does option-implied volatility forecast realized volatility? Evidence from news events

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  • Chen, Sipeng
  • Li, Gang

Abstract

This study examines the information content of stock option-implied volatility. We measure the arrival intensities and magnitudes of scheduled and unscheduled news as well as fundamental and non-fundamental news. Most of these news measures exhibit strong and positive associations with contemporaneous stock return volatility, and many of them can be predicted by implied volatility. Approximately one third of the predictive power of implied volatility on future realized volatility can be attributed to its ability to predict these news measures, with the majority of the predictive power arising from its capacity to predict the arrival intensities of both scheduled and unscheduled news. The predictive power is higher for fundamental news than for non-fundamental news.

Suggested Citation

  • Chen, Sipeng & Li, Gang, 2023. "Why does option-implied volatility forecast realized volatility? Evidence from news events," Journal of Banking & Finance, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:jbfina:v:156:y:2023:i:c:s0378426623002108
    DOI: 10.1016/j.jbankfin.2023.107019
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    2. Oana Panazan & Catalin Gheorghe, 2024. "Impact of Geopolitical Risk on G7 Financial Markets: A Comparative Wavelet Analysis between 2014 and 2022," Mathematics, MDPI, vol. 12(3), pages 1-22, January.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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