The informational quality of implied volatility and the volatility risk premium

Stephen Ferris, Woojin Kim () and Kwangwoo Park

Applied Economics Letters, 2010, vol. 17, issue 5, 445-450

Abstract: This article examines the informational quality of implied volatility in forecasting future realized volatility using daily S&P 500 and S&P 100 index option prices from 2000 to 2006. In contrast to many previous studies, we find that implied volatility is an unbiased and efficient estimator of future realized volatility. Unlike implied volatility estimates; both historical and conditional volatility estimates using GARCH and EGARCH models possess limited explanatory power. A delta-hedged trading strategy with long positions in calls, however, generates significantly negative profits that imply a misspecification of constant volatility models. These results suggest that implied volatility estimates from constant volatility models contain valuable information, even though the model might be misspecified.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:17:y:2010:i:5:p:445-450

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DOI: 10.1080/13504850801935356

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