INFORMATIONAL EFFICIENCY OF THE US MARKETS FOR IMPLIED VOLATILITY BEFORE AND AFTER THE COVID-19 PANDEMIC

• Published in: Applied Finance Letters Vol. 11; pp. 50 - 64
• Main Author: Fousekis, Panos
• Format: Journal Article
• Language: English
• Published: Tuwhera Open Access Publisher 14-12-2022
• ISSN: 2253-5799; 2253-5802
• DOI: 10.24135/afl.v11i.544

The objective of this work is to assess informational efficiency in four US markets for implied volatility. This has been pursued using daily data over 2015 to 2021 and a composite index that accounts for three possible sources of inefficiency associated with long-range dependence, short-range dependence, and entropy. The dominant pattern of long-range dependence has been that of anti-persistence both before and during the pandemic. The same applies for short-range dependence, especially before the pandemic. The presence of anti-persistence is an indication of investors’ over-reaction to incoming information and implies that oscillatory trading strategies have been probably more successful that trend-following ones. During the Covid-19 pandemic, the entropy decreased in all cases suggesting that the four implied volatility series became more predictable; the intensity, however, of long-range and short-range dependence remained largely unaffected. As a result of these developments, the informational efficiency in at least two markets (those related to stock and to crude oil) fell.