The Optimal Corridor for Implied Volatility: from Calm to Turmoil Periods

Silvia Muzzioli ()

Department of Economics (DEMB) from University of Modena and Reggio Emilia, Department of Economics "Marco Biagi"

Abstract: Corridor implied volatility is obtained from model-free implied volatility by truncating the integration domain between two barriers. Empirical evidence on volatility forecasting, in various markets, points to the utility of trimming the risk-neutral distribution of the underlying stock price, in order to obtain unbiased measures of future realised volatility (see e.g. [9], [3]). The aim of the paper is to investigate, both in a statistical and in an economic setting, the optimal corridor of strike prices to use for volatility forecasting in the Italian market, by analysing a data set which covers the years 2005-2010 and span both a relatively tranquil and a turmoil period

Keywords: corridor implied volatility; model-free implied volatility; volatility forecasting; financial turmoil (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: pages 26
Date: 2013-12
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (6)

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