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On the Relationship of Ex-ante and Ex-post Volatility: A Sub-period Analysis of S&P CNX Nifty Index Options

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  • Imlak Shaikh
  • Puja Padhi

Abstract

In this article, the information content of implied volatility is studied at sub-periods (i.e., pre- and post-crises of 2007–09). The main objective is to judge the predictive power of implied volatility in the pre- and post-crises period, using at-the-money (ATM) non-overlapping monthly implied volatilities of Nifty Index options. A simple ordinary least squares (OLS) estimation is used to analyse the information content of implied volatility in sub-periods. An autoregressive-moving average (ARMA) structure is analysed for the assessment of times series property of ex-ante and ex-post volatility. An autoregressive distributed lag (ARDL) model is adopted to choose the most advantageous forecasting model for predicting the future volatility. The OLS estimation shows that implied volatility is more biased in the pre-crises period. The two-stage least squares (2SLS) estimation clearly explains that implied volatility is an unbiased estimate of the future realised volatility. An ARMA (1,1) and ARDL (1,0) is the best model of future volatility estimation. This study explains that for Indian derivative market, volatility estimates based on options are useful for the pricing of derivative instruments and portfolio risk management. JEL Classification: G13, G14, C53

Suggested Citation

  • Imlak Shaikh & Puja Padhi, 2015. "On the Relationship of Ex-ante and Ex-post Volatility: A Sub-period Analysis of S&P CNX Nifty Index Options," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 140-175, August.
  • Handle: RePEc:sae:emffin:v:14:y:2015:i:2:p:140-175
    DOI: 10.1177/0972652715584266
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    References listed on IDEAS

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    More about this item

    Keywords

    Implied volatility; realised volatility; ex-ante volatility; ex-post volatility; sub-periods; distributed lag; information content;
    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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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