The relation between implied and realized volatility

The relation between implied and realized volatility

Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past vo...

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Bibliographic Details
Published in:Journal of financial economics Vol. 50; no. 2; pp. 125 - 150
Main Authors: Christensen, B.J., Prabhala, N.R.
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01-11-1998
Elsevier Sequoia S.A
Subjects:
Financial economics
Forecasts
Information
Market efficiency
Options
Price indexes
Regression analysis
Sampling
Securities analysis
Securities prices
Stock exchange
Stock market crash
Stock prices
Time series
Volatility
United States > US
C53
Options
Stock market crash
Volatility
G13
Market efficiency
G14
Information
Online Access:Get full text
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Description
Summary:Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications. Our results differ from previous studies because we use longer time series and nonoverlapping data. A regime shift around the October 1987 crash explains why implied volatility is more biased in previous work.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(98)00034-8