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The Jump component of S&P 500 volatility and the VIX index

  • Ralf Becker
  • Adam Clements

    ()

  • Andrew McClelland

Much research has investigated the differences between option implied volatilities and econometric model-based forecasts in terms of forecast accuracy and relative informational content. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing to generate forecasts. Therefore, implied volatility has the potential to reflect information that a model-based forecast could not. Specifically, this paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information relative to model based forecasts pertaining to future jumps. It is found that the VIX index both subsumes information relating to past jump contributions to volatility and reflects incremental information pertaining to future jump activity, relative to modelbased forecasts. This is an issue that has not been examined previously in the literature and expands our understanding of how option markets form their volatility forecasts.

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File URL: http://www.ncer.edu.au/papers/documents/WpNo24Mar08.pdf
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Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 24.

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Length: 17 pages
Date of creation: 17 Mar 2008
Date of revision:
Handle: RePEc:qut:auncer:2008-13
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