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The Information Content of Option-Based Forecasts of Volatility: Evidence from the Italian Stock Market

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  • Silvia Muzzioli

    (Department of Economics and CEFIN, University of Modena and Reggio Emilia, Viale Berengario 51, 41100 Modena (I), Italy)

Abstract

The aim of this paper is to comprehensively compare option-based measures of volatility, with the ultimate plan of devising a new volatility index for the Italian stock market. The performance of the different implied volatility measures in forecasting future volatility is evaluated both in a statistical and in an economic setting. The properties of the implied volatility measures are also explored, by looking at both the contemporaneous relationship between implied volatility changes and market returns and the usefulness of the proposed index in forecasting future market returns.The results of the paper are of practical importance for both policy-makers and investors. The volatility index, based on corridor measures, could be used to forecast market volatility, for value at risk purposes, in order to determine trading strategies on the underlying index and as an early warning for future market conditions.

Suggested Citation

  • Silvia Muzzioli, 2013. "The Information Content of Option-Based Forecasts of Volatility: Evidence from the Italian Stock Market," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-46.
    • Handle: RePEc:wsi:qjfxxx:v:03:y:2013:i:01:n:s2010139213500055
    DOI: 10.1142/S2010139213500055
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    Cited by:

    1. Elyas Elyasani & Luca Gambarelli & Silvia Muzzioli, 2016. "The risk asymmetry index," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0061, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    2. Cipollini, Andrea & Cascio, Iolanda Lo & Muzzioli, Silvia, 2015. "Volatility co-movements: A time-scale decomposition analysis," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 34-44.
    3. Luca Gambarelli & Silvia Muzzioli, 2019. "Risk-asymmetry indices in Europe," Department of Economics 0157, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    4. Giovanni Campisi & Luca La Rocca & Silvia Muzzioli, 2023. "Assessing skewness in financial markets," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 77(1), pages 48-70, February.
    5. Andrea Cipollini & Iolanda Lo Cascio & Silvia Muzzioli, 2015. "Financial connectedness among European volatility risk premia," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0058, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    6. Elyas Elyasiani & Silvia Muzzioli & Alessio Ruggieri, 2016. "Forecasting and pricing powers of option-implied tree models: Tranquil and volatile market conditions," Department of Economics 0099, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    7. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2018. "The Risk-Asymmetry Index as a new Measure of Risk," Multinational Finance Journal, Multinational Finance Journal, vol. 22(3-4), pages 173-210, September.
    8. Muzzioli, Silvia, 2015. "The optimal corridor for implied volatility: From periods of calm to turmoil," Journal of Economics and Business, Elsevier, vol. 81(C), pages 77-94.
    9. Andrea Cipollini & Iolanda Lo Cascio & Silvia Muzzioli, 2015. "Financial connectedness among European volatility risk premia," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 15112, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    10. Cipollini, Andrea & Lo Cascio, Iolanda & Muzzioli, Silvia, 2018. "Risk aversion connectedness in five European countries," Economic Modelling, Elsevier, vol. 71(C), pages 68-79.
    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 (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-34.

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    More about this item

    Keywords

    Volatility index; Black-Scholes implied volatility; model-free implied volatility; corridor implied volatility; implied binomial trees; G13; G14;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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