Why does option-implied volatility forecast realized volatility? Evidence from news events

Sipeng Chen and Gang Li

Journal of Banking & Finance, 2023, vol. 156, issue C

Abstract: This study examines the information content of stock option-implied volatility. We measure the arrival intensities and magnitudes of scheduled and unscheduled news as well as fundamental and non-fundamental news. Most of these news measures exhibit strong and positive associations with contemporaneous stock return volatility, and many of them can be predicted by implied volatility. Approximately one third of the predictive power of implied volatility on future realized volatility can be attributed to its ability to predict these news measures, with the majority of the predictive power arising from its capacity to predict the arrival intensities of both scheduled and unscheduled news. The predictive power is higher for fundamental news than for non-fundamental news.

Keywords: Implied volatility; Realized volatility; News intensity and magnitude; Scheduled and unscheduled news; Fundamental and non-fundamental news (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:156:y:2023:i:c:s0378426623002108

DOI: 10.1016/j.jbankfin.2023.107019

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