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

Silvia Muzzioli ()

Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: Option based volatility forecasts can be divided into “model dependent” forecast, such as implied volatility, that is obtained by inverting the Black and Scholes formula, and “model free” forecasts, such as model free volatility, proposed by Britten-Jones and Neuberger (2000), that do not rely on a particular option pricing model. The aim of this paper is to investigate the unbiasedness and efficiency in predicting future realized volatility of the two option based volatility forecasts: implied volatility and model free volatility. The comparison is pursued by using intradaily data on the Dax-index options market. Our results suggest that Black-Scholes volatility subsumes all the information contained in historical volatility and is a better predictor than model free volatility.

Keywords: Implied Volatility; Model free volatility; Volatility Forecasting (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: pages 25
Date: 2008-05
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Persistent link: https://EconPapers.repec.org/RePEc:mod:wcefin:0011

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