Financial volatility modeling with option-implied information and important macro-factors

Stavroula Yfanti and Menelaos Karanasos

Journal of the Operational Research Society, 2022, vol. 73, issue 9, 2129-2149

Abstract: The research debate on the informational content embedded in option prices mostly approves the incremental predictive power of implied volatility estimates for financial volatility forecasting beyond that contained in GARCH and realized variance models. Contributing to this ongoing debate, we introduce the novel AIM-HEAVY model, a tetravariate system with asymmetries, option-implied volatility, and economic uncertainty variables beyond daily and intra-daily dispersion measures included in the benchmark HEAVY specification. We associate financial with macroeconomic uncertainties to explore the macro-financial linkages in the high-frequency domain. In this vein, we further focus on economic factors that exacerbate stock market volatility and represent major threats to financial stability. Hence, our findings are directly connected to the current world-wide Coronavirus outbreak. Financial volatilities are already close to their crisis-peaks amid the generalized fear about controversial economic policies to support societies and the financial system, especially in the case of the heavily criticized UK authorities’ delayed and limited response.

Date: 2022
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DOI: 10.1080/01605682.2021.1966327

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