Option-based forecasts of volatility: an empirical study in the DAX-index options market
Volatility estimation and forecasting are essential for both the pricing and the risk management of derivative securities. Volatility forecasting methods can be divided into option-based ones, which use prices of traded options in order to unlock volatility expectations, and time series volatility models, which use historical information in order to predict future volatility. Among option-based volatility forecasts, we distinguish between the 'model-dependent' Black-Scholes implied volatility and the 'model-free' implied volatility, proposed by Britten-Jones and Neuberger [Option prices, implied price processes and stochastic volatility. Journal of Finance 55: 839-66], that does not rely on a particular option pricing model. The aim of this paper is to investigate the unbiasedness and efficiency, with respect to past realised volatility, of the two option-based volatility forecasts. The comparison is pursued by using intra-daily data on the DAX-index options market. Our results suggest that Black-Scholes implied volatility subsumes all the information contained in past realised volatility and is a better predictor for future realised volatility than model-free implied volatility.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 16 (2010)
Issue (Month): 6 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/REJF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/REJF20|
When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:561-586. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.