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The Jump component of S&P 500 volatility and the VIX index

Ralf Becker, Adam Clements and Andrew McClelland

No 24, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Much research has investigated the differences between option implied volatilities and econometric model-based forecasts in terms of forecast accuracy and relative informational content. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing to generate forecasts. Therefore, implied volatility has the potential to reflect information that a model-based forecast could not. Specifically, this paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information relative to model based forecasts pertaining to future jumps. It is found that the VIX index both subsumes information relating to past jump contributions to volatility and reflects incremental information pertaining to future jump activity, relative to modelbased forecasts. This is an issue that has not been examined previously in the literature and expands our understanding of how option markets form their volatility forecasts.

Keywords: Implied volatility; VIX; volatility forecasts; informational efficiency; jumps (search for similar items in EconPapers)
JEL-codes: C12 C22 G00 G14 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2008-03-17
New Economics Papers: this item is included in nep-cfn, nep-fmk, nep-for and nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Journal Article: The jump component of S&P 500 volatility and the VIX index (2009) Downloads
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