The Information Content of Option-Impliedolatility for Realized Volatility
Date Issued
2008
Date
2008
Author(s)
Chuang, Ming-Lin
Abstract
We use 5-minute high frequency index returns to stimate realized volatility of S&P 500 index. Our sample period is from May 1997 to December 2005. We employ both univariate and encompassing regressions to analyze the information content of B-S and model-free Implied Volatility calculated over 7-day, 30-day 60-days, 90-day and shortest maturity horizons. We focus on the comparison of prediction ability and the information content between different models as well as different data, including call option, put option and weighted average. We find the prediction ability of implied volatility of put option exceeds that of call option in the short run, though it does not subsume all the information contained in call option. However, the prediction ability of implied volatility of call option is better than that of put option in the long run, though it does not subsume all the information contained in put option. In addition, the average implied volatility weighted by volume is better than either call option or put option. Finally, we find that if we use the weighted average data, the B-S Implied Volatility beats the model-free implied volatility. We hopenvestors can benefit from the empirical results by choosing effective implied volatility of option to assess realized volatility and thus form their investment strategy.
Subjects
options
Black-Scholes implied volatility
model-free implied volatility
weighted average volatility
realized volatility
Type
thesis
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