Post by Sapphire Capital on Aug 21, 2008 23:05:57 GMT 4
The Information Content of Implied Volatility: Evidence from Australia
Bart Frijns
Auckland University of Technology - Faculty of Business
Christian Tallau
University of Goettingen (Gottingen)
Alireza Tourani Rad
Auckland University of Technology - Faculty of Business
July 30, 2008
Abstract:
In this paper we develop and evaluate the information content of an implied volatility index for the Australian stock market. Using price data on S&P/ASX 200 index options and SFE SPI 200 index futures options, we develop implied volatility indices with a time to maturity of three months and one month, respectively. When evaluating the information content of both implied volatility indices we find that the implied volatility index based on the S&P/ASX 200 index options with a three-month horizon is most informative in terms of explaining stock market returns and forecasting future volatility. For this implied volatility index we find a significant negative and asymmetric relationship between changes in implied volatility and S&P/ASX 200 returns, i.e., stock market prices decline more when implied volatility increases than they increase when implied volatility drops. When evaluating the forecasting power of implied volatility for future market volatility we find that the implied volatility index based on the S&P/ASX 200 index options contains important information both in-sample and out-of-sample. In-sample, the implied volatility index significantly improves the fit of a GJR-GARCH(1, 1) model. Out-of-sample, we find that the implied volatility index significantly outperforms the RiskMetrics and GJR-GARCH(1, 1) model, with its highest forecasting power at the one-month forecasting horizon.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1189922_code105678.pdf?abstractid=1189922&mirid=4
Bart Frijns
Auckland University of Technology - Faculty of Business
Christian Tallau
University of Goettingen (Gottingen)
Alireza Tourani Rad
Auckland University of Technology - Faculty of Business
July 30, 2008
Abstract:
In this paper we develop and evaluate the information content of an implied volatility index for the Australian stock market. Using price data on S&P/ASX 200 index options and SFE SPI 200 index futures options, we develop implied volatility indices with a time to maturity of three months and one month, respectively. When evaluating the information content of both implied volatility indices we find that the implied volatility index based on the S&P/ASX 200 index options with a three-month horizon is most informative in terms of explaining stock market returns and forecasting future volatility. For this implied volatility index we find a significant negative and asymmetric relationship between changes in implied volatility and S&P/ASX 200 returns, i.e., stock market prices decline more when implied volatility increases than they increase when implied volatility drops. When evaluating the forecasting power of implied volatility for future market volatility we find that the implied volatility index based on the S&P/ASX 200 index options contains important information both in-sample and out-of-sample. In-sample, the implied volatility index significantly improves the fit of a GJR-GARCH(1, 1) model. Out-of-sample, we find that the implied volatility index significantly outperforms the RiskMetrics and GJR-GARCH(1, 1) model, with its highest forecasting power at the one-month forecasting horizon.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1189922_code105678.pdf?abstractid=1189922&mirid=4