Indices for Financial Market Volatility Obtained Through Fuzzy Regression

Silvia Muzzioli (), Luca Gambarelli () and Bernard De Baets ()
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Silvia Muzzioli: Department of Economics and CEFIN, University of Modena and Reggio Emilia, Viale Berengario 51, Modena 41121, Italy
Luca Gambarelli: Department of Economics, University of Modena and Reggio Emilia, Viale Berengario 51, Modena 41121, Italy
Bernard De Baets: KERMIT, Department of Mathematical Modelling, Statistics and Bioinformatics, Ghent University, Coupure Link 653, Ghent B-9000, Belgium

International Journal of Information Technology & Decision Making (IJITDM), 2018, vol. 17, issue 06, 1659-1691

Abstract: The measurement of volatility is of fundamental importance in finance. Standard market practice adopted for volatility estimation from option prices leads to a considerable loss of information and the introduction of an element of arbitrariness in the volatility index computation. We propose to adopt fuzzy regression methods in order to include all the available information from option prices, and to obtain an informative volatility index. In fact, the obtained fuzzy volatility indices not only offer a most possible value, but also a lower and an upper bound for the interval of possible values, providing investors with an additional source of information. We also propose a defuzzification procedure to select a representative value within this interval. Moreover, we investigate the occurrence of truncation and discretization errors in volatility index computation by adopting an interpolation-extrapolation method. We also test the forecasting power of each volatility index on future realized volatility.

Keywords: Fuzzy volatility index; fuzzy regression methods; defuzzification procedure; volatility forecasting; implied volatility (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219622018500335

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