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Volatility Indexes seem to point to the Past

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  • Schroeder, Gerhard

Abstract

In theory, by trading options, market participants asses and set future volatilities that can be identified using the Black-Scholes-formula in reverse. In reality, as regression analysis suggests, it is historical market data which instead are used to determine future values. Further analysis shows that historical volatilities are insufficient predictors. Yet this questionable practice is considered by international accounting standards (IAS/IFRS) to allow "historical data and implied volatilities" for "reasonable estimations". In a kind of short-circuit, historical volatilities are introduced into option trading and returned as implied volatilities. In reality, both differ significantly from future values. Comparing the volatility of the past nine weeks with that of the following nine weeks, estimation error ranges from four to over ten percentage points. (No paper found in the net challenging the implied hypothesis of IAS 39/AG82(f))

Suggested Citation

  • Schroeder, Gerhard, 2009. "Volatility Indexes seem to point to the Past," MPRA Paper 18025, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:18025
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    More about this item

    Keywords

    Volatility; Prediction; EU Accounting Standards; IAS; Correlation; GARCH; Derivatives;

    JEL classification:

    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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