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Predicting Implied Volatility with Historical Volatility

In: Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes

Author

Listed:
  • Xinjie Wang
  • Ge Wu
  • Suyang Zhao

Abstract

In this study, we document a novel lead–lag relation between historical and implied volatilities based on China’s CSI300 Index options. We show that historical volatilities have incremental information when we predict implied volatilities, and this pattern tends to be more stable for put options than for call options. Moreover, we reveal that this lead– lag relation is relevant to option terms and time horizons of historical volatilities, which means implied volatilities of long-term options are more likely to be properly predicted by long-term historical volatilities on average. Finally, we find that speculative trading might explain our results.

Suggested Citation

  • Xinjie Wang & Ge Wu & Suyang Zhao, 2024. "Predicting Implied Volatility with Historical Volatility," World Scientific Book Chapters, in: Cheng Few Lee & Alice C Lee & John C Lee (ed.), Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives In 4 Volumes, chapter 68, pages 2151-2175, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811269943_0068
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    Keywords

    Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G3 - Financial Economics - - Corporate Finance and Governance

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