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On the relationship of implied, realized and historical volatility: evidence from NSE equity index options

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  • Puja Padhi
  • Imlak Shaikh

Abstract

This study examines the information content of implied volatility, using the options of the underlying S&P CNX Nifty index. In this study, implied, historical and realized volatilities are calculated using non-overlapping monthly at-the-money samples. The study covers the period from introduction of options on the derivative segment of NSE, June 2001 to May 2011. The results reveal that call and put implied volatility of S&P CNX Nifty index option does contain information about future realized return volatility. This study accounts for the problem of error-in-variable and controls for it by using the instrumental variable technique. In the 2SLS estimation, the Hausman H -statistic shows that call implied volatility is measured with error. Hence, 2SLS coefficients are more consistent than the OLS estimates. Results of this study might prove to be helpful to the volatility traders in volatility forecasting and option pricing.

Suggested Citation

  • Puja Padhi & Imlak Shaikh, 2014. "On the relationship of implied, realized and historical volatility: evidence from NSE equity index options," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(5), pages 915-934, November.
    • Handle: RePEc:taf:jbemgt:v:15:y:2014:i:5:p:915-934
    DOI: 10.3846/16111699.2013.793605
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    Cited by:

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    4. Shaikh, Imlak, 2017. "The 2016 U.S. presidential election and the Stock, FX and VIX markets," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 546-563.

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