The skew pattern of implied volatility in the DAX index options market

Silvia Muzzioli ()

Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi"

Abstract: The aim of this paper is twofold: to investigate how the information content of implied volatility varies according to moneyness and option type and to compare the latter option based forecasts with historical volatility in order to see if they subsume all the information contained in the latter. We run a horse race of different implied volatility estimates: at the money and out of the money call and put implied volatilities and average implied that is a weighted average of at the money call and put implied volatilities with weights proportional to trading volume. Two hypotheses are tested: unbiasedness and efficiency of the different volatility forecasts. The investigation is pursued in the Dax index options market, by using synchronous prices matched in a one minute interval. The results highlight that the information content of implied volatility has a humped shape, with out of the money options being less informative than at the money ones. Overall, the best forecast is at the money put implied volatility: it is unbiased (after a constant adjustment) and efficient, in that it subsumes all the information contained in historical volatility.

Keywords: implied Volatility; volatility Smile; volatility forecasting; option type (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-for and nep-mst
Date: 2009-07

Downloads: (external link)
http://merlino.unimo.it/web_dep/materiali_discussione/0617.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:mod:depeco:0617

Access Statistics for this paper

More papers in Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi"
Contact information at EDIRC.
Series data maintained by Monica Morselli ().