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Does implied volatility reflect a wider information set than econometric forecasts?

Ralf Becker, Adam Clements and James Curchin

No 15, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Much research has addressed the relative performance of option implied volatilities and econometric model based forecasts in terms of forecasting asset return volatility. The general theme to come from this body of work is that implied volatility is a superior forecast. Some authors attribute this to the fact that option markets use a wider information set when forming their forecasts of volatility. This article considers this issue and determines whether S&P 500 implied volatility reflects a set of economic information beyond its impact on the prevailing level of volatility. It is found, that while the implied volatility subsumes this information, as do model based forecasts, this is only due to its impact on the current or prevailing level of volatility. Therefore, it appears as though implied volatility does not reflect a wider information set than model based forecasts, implying that implied volatility forecasts simply reflect volatility persistence in much the same way of as do econometric models.

Keywords: Implied volatility; VIX; volatility forecasts; informational efficiency (search for similar items in EconPapers)
JEL-codes: C12 C22 G00 G14 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2007-05-22
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Citations: View citations in EconPapers (1)

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Handle: RePEc:qut:auncer:2007-9