Predicting Implied Volatility with Historical Volatility

Xinjie Wang, Ge Wu and Suyang Zhao

Chapter 68 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 2151-2175 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this study, we document a novel lead–lag relation between historical and implied volatilities based on China’s CSI300 Index options. We show that historical volatilities have incremental information when we predict implied volatilities, and this pattern tends to be more stable for put options than for call options. Moreover, we reveal that this lead– lag relation is relevant to option terms and time horizons of historical volatilities, which means implied volatilities of long-term options are more likely to be properly predicted by long-term historical volatilities on average. Finally, we find that speculative trading might explain our results.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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