Forecasting stock market volatility using implied volatility: evidence from extended realized EGARCH-MIDAS model

Xinyu Wu, Xiaona Wang and Haiyun Wang

Applied Economics Letters, 2021, vol. 28, issue 11, 915-920

Abstract: This paper extends the realized EGARCH-MIDAS (REGARCH-MIDAS) model to incorporate implied volatility (IV) derived from option prices. The extension allows us to examine the incremental information content of IV for forecasting volatility. An empirical investigation with S&P 500 index shows that IV contains valuable information for forecasting volatility. Our proposed model provides more accurate out-of-sample volatility forecasts compared to the EGARCH, the REGARCH and the REGARCH-MIDAS models as well as the EGARCH-IV and the REGARCH-IV models.

Date: 2021
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DOI: 10.1080/13504851.2020.1785617

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