The Information Content of Alternate Implied Volatility Models: Case of Indian Markets

A. Vinay Kumar and Shikha Jaiswal
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A. Vinay Kumar: A. Vinay Kumar (corresponding author), Associate Professor, Finance and Accounting Group, Indian Institute of Management, Prabandh Nagar, Off Sitapur Road, Lucknow, India. E-mail: vinay@iiml.ac.in
Shikha Jaiswal: Shikha Jaiswal, doctoral student of Finance, Emory University, USA. E-mail: shikhaj25@gmail.com

Journal of Emerging Market Finance, 2013, vol. 12, issue 3, 293-321

Abstract: The information content to forecast the future realised volatility by model-based implied volatility and model free implied volatility has been an increasingly important area of research. There is a lot of literature suggesting that Black Scholes implied volatility is an efficient estimator ( Fleming 1998 ); on the contrary there are studies suggesting that model free measures like VIX could be more informative ( Jiang and Tian 2005 ). There is also a view, as evidenced in the earlier research, that there is a complete lack of relationship between them. The current study seeks to understand these dynamics in the Indian context and add to the debate by specifying market direction variables which could explain the relationship. The study tries to bring out the short-term relationship between the two volatilities. The present study finds evidence supporting Fleming ( 1998 ) and contrary to the evidence suggested by Jiang and Tian ( 2005 ), that is, Black Scholes implied volatility dominates the forecasting efficiency over the VIX even though both estimates are biased. JEL Classification: G12, G13, G14, C22

Keywords: Black Scholes implied volatility; VIX; realised volatility; historical volatility; market efficiency; generalised method of movements (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:12:y:2013:i:3:p:293-321

DOI: 10.1177/0972652713512915

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