Option-based forecasts of volatility: an empirical study in the DAX-index options market

Silvia Muzzioli ()

The European Journal of Finance, 2010, vol. 16, issue 6, 561-586

Abstract: Volatility estimation and forecasting are essential for both the pricing and the risk management of derivative securities. Volatility forecasting methods can be divided into option-based ones, which use prices of traded options in order to unlock volatility expectations, and time series volatility models, which use historical information in order to predict future volatility. Among option-based volatility forecasts, we distinguish between the 'model-dependent' Black-Scholes implied volatility and the 'model-free' implied volatility, proposed by Britten-Jones and Neuberger [Option prices, implied price processes and stochastic volatility. Journal of Finance 55: 839-66], that does not rely on a particular option pricing model. The aim of this paper is to investigate the unbiasedness and efficiency, with respect to past realised volatility, of the two option-based volatility forecasts. The comparison is pursued by using intra-daily data on the DAX-index options market. Our results suggest that Black-Scholes implied volatility subsumes all the information contained in past realised volatility and is a better predictor for future realised volatility than model-free implied volatility.

Keywords: Black-Scholes implied volatility; model-free implied volatility; volatility forecasting (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (56)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13518471003640134 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:16:y:2010:i:6:p:561-586

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/REJF20

DOI: 10.1080/13518471003640134

Access Statistics for this article

The European Journal of Finance is currently edited by Chris Adcock

More articles in The European Journal of Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().