Have returns and volatilities for financial assets responded to implied volatility during the COVID-19 pandemic?

Aktham Maghyereh, Hussein Abdoh and Basel Awartani

Journal of Commodity Markets, 2022, vol. 26, issue C

Abstract: This paper uses transfer entropy measures to analyze the information sharing between the option implied volatility, the realized volatility and the returns of six financial assets during the COVID-19 pandemic. The measures indicate increases in the information transmissions during the pandemic which are uniform across the volatilities and the returns of all assets. In these transmissions, the option implied volatilities are found to play the central role, particularly in the returns of the assets as opposed to its realized volatilities. Thus, we may conclude that the predictability of the volatilities derived from option pricing models has improved during the pandemic and that this improvement has reduced the uncertainty of the future returns and the volatilities, albeit to a lower extent. These findings bear implications for constructing models that predict volatilities and returns during crises periods.

Keywords: COVID-19; Mutual information; Transfer entropy; Implied volatility; Realized variance and returns (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:26:y:2022:i:c:s2405851321000283

DOI: 10.1016/j.jcomm.2021.100194

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