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The Information Content of Option Implied Volatility Surrounding the 1997 Hong Kong Stock Market Crash

Joseph K.W. Fung
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Joseph K.W. Fung: Hong Kong Baptist University

No 212005, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This study examines the information conveyed by options, and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The paper determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other candidate leading indicators. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, non-overlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The paper also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility.

Pages: 23 pages
Date: 2005-12
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