STOCK MARKET VOLATILITY AND THE FORECASTING ACCURACY OF IMPLIED VOLATILITY INDICES

Kazuhiko Nishina, Nabil Maghrebi () and Moo-Sung Kim
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Kazuhiko Nishina: Graduate School of Economics, Osaka University
Nabil Maghrebi: Faculty of Economics, Wakayama University
Moo-Sung Kim: College of Business Administration, Pusan National University

No 06-09, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This study develops a new model-free benchmark of implied volatility for the Japanese stock market similar in construction to the new VIX based on the S&P 500 index. It also examines the stochastic dynamics of the implied volatility index and its relationship with realized volatility in both markets. There is evidence that implied volatility is governed by a long-memory process. Despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. The implied volatility index is also found to be inclusive of some but not all information on future volatility contained in historical returns. However, its higher out-of sample performance provides further support to the rationale behind drawing inference about future stock market volatility based on the incremental information contained in options prices.

Keywords: Licensing; Implied volatility index, Out-of-sample forecasting, GARCH modelling (search for similar items in EconPapers)
JEL-codes: C52 C53 G14 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2006-03
New Economics Papers: this item is included in nep-ets, nep-fin, nep-fmk, nep-for, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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