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The information content of implied volatility: Evidence from Australia

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  • Bart Frijns
  • Christian Tallau
  • Alireza Tourani‐Rad

Abstract

This study develops an implied volatility index for the Australian stock market, termed as the AVX, and assesses its information content. The AVX is constructed using S&P/ASX 200 index options with a constant time‐to‐maturity of three months. It is observed that the AVX has a significant negative and asymmetric relationship with S&P/ASX 200 returns. When evaluating the forecasting power of the AVX for future stock market volatility, it is found that the AVX contains important information both in‐sample and out‐of‐sample. In‐sample, the AVX significantly improves the fit of a GJR‐GARCH(1, 1) model. Out‐of‐sample, the AVX significantly outperforms the RiskMetrics approach and the GJR‐GARCH(1, 1) model, with its highest forecasting power at the one‐month forecasting horizon. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:134–155, 2010

Suggested Citation

  • Bart Frijns & Christian Tallau & Alireza Tourani‐Rad, 2010. "The information content of implied volatility: Evidence from Australia," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(2), pages 134-155, February.
  • Handle: RePEc:wly:jfutmk:v:30:y:2010:i:2:p:134-155
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    Cited by:

    1. Costas Siriopoulos & Athanasios Fassas, 2013. "Dynamic relations of uncertainty expectations: a conditional assessment of implied volatility indices," Review of Derivatives Research, Springer, vol. 16(3), pages 233-266, October.
    2. López, Raquel, 2015. "Do stylized facts of equity-based volatility indices apply to fixed-income volatility indices? Evidence from the US Treasury market," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 292-303.
    3. repec:eee:phsmap:v:514:y:2019:i:c:p:156-166 is not listed on IDEAS
    4. Imlak Shaikh & Puja Padhi, 2014. "The forecasting performance of implied volatility index: evidence from India VIX," Economic Change and Restructuring, Springer, vol. 47(4), pages 251-274, November.
    5. repec:eee:revfin:v:35:y:2017:i:c:p:66-81 is not listed on IDEAS
    6. Degiannakis, Stavros & Filis, George & Hassani, Hossein, 2015. "Forecasting implied volatility indices worldwide: A new approach," MPRA Paper 72084, University Library of Munich, Germany.
    7. Supachok Thakolsri & Yuthana Sethapramote & Komain Jiranyakul, 2016. "Relationship of the Change in Implied Volatility with the Underlying Equity Index Return in Thailand," Economic Research Guardian, Weissberg Publishing, vol. 6(2), pages 74-86, December.
    8. repec:eee:pacfin:v:53:y:2019:i:c:p:399-409 is not listed on IDEAS
    9. repec:eee:empfin:v:46:y:2018:i:c:p:111-129 is not listed on IDEAS
    10. Degiannakis, Stavros & Filis, George, 2016. "Forecasting oil price realized volatility: A new approach," MPRA Paper 69105, University Library of Munich, Germany.
    11. Han, Heejoon & Kutan, Ali M. & Ryu, Doojin, 2015. "Effects of the US stock market return and volatility on the VKOSPI," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-34.
    12. Han, Heejoon & Kutan, Ali M. & Ryu, Doojin, 2015. "Modeling and predicting the market volatility index: The case of VKOSPI," Economics Discussion Papers 2015-7, Kiel Institute for the World Economy (IfW).
    13. Mai, Van Anh (Vivian) & Ang, Tze Chuan ‘Chewie’ & Fang, Victor, 2016. "Aggregate volatility risk and the cross-section of stock returns: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 134-149.
    14. repec:eee:ecofin:v:47:y:2019:i:c:p:622-636 is not listed on IDEAS
    15. Badshah, Ihsan & Frijns, Bart & Knif, Johan & Tourani-Rad, Alireza, 2016. "Asymmetries of the intraday return-volatility relation," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 182-192.
    16. repec:eee:intfor:v:33:y:2017:i:4:p:848-863 is not listed on IDEAS
    17. repec:eee:jimfin:v:76:y:2017:i:c:p:28-49 is not listed on IDEAS
    18. Kim, Jun Sik & Ryu, Doojin, 2015. "Are the KOSPI 200 implied volatilities useful in value-at-risk models?," Emerging Markets Review, Elsevier, vol. 22(C), pages 43-64.
    19. repec:eee:glofin:v:36:y:2018:i:c:p:41-61 is not listed on IDEAS
    20. Gatfaoui, Hayette, 2013. "Translating financial integration into correlation risk: A weekly reporting's viewpoint for the volatility behavior of stock markets," Economic Modelling, Elsevier, vol. 30(C), pages 776-791.
    21. Smales, Lee A., 2015. "Better the devil you know: The influence of political incumbency on Australian financial market uncertainty," Research in International Business and Finance, Elsevier, vol. 33(C), pages 59-74.

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