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The relation between implied and realized volatility
Open accessAbstract
Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications. Our results differ from previous studies because we use longer time series and nonoverlapping data. A regime shift around the October 1987 crash explains why implied volatility is more biased in previous work.
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Cites
The pricing of options and corporate liabilities
Black, F., & Scholes, M. (1973) · Journal of Political Economy · doi:10.1086/260062 · Cited by 29,074
Specification Tests in Econometrics
Hausman, J. A. (1978) · Econometrica · doi:10.2307/1913827 · Cited by 18,820
Cited by
Answering the Skeptics: Yes, Standard Volatility Models do Provide Accurate Forecasts
Andersen, T. G., & Bollerslev, T. (1998) · International Economic Review · doi:10.2307/2527343 · Cited by 3,375
Forecasting Volatility in Financial Markets: A Review
Poon, S., & Granger, C. W. J. (2003) · Journal of Economic Literature · doi:10.1257/002205103765762743 · Cited by 1,315
Estimating quadratic variation using realized variance
Barndorff‐Nielsen, O. E., & Shephard, N. (2002) · Journal of Applied Econometrics · doi:10.1002/jae.691 · Cited by 616
The dynamics of stochastic volatility: evidence from underlying and options markets
Jones, C. S. (2003) · Journal of Econometrics · doi:10.1016/s0304-4076(03)00107-6 · Cited by 503
Cross-section of option returns and volatility☆
Goyal, A., & Saretto, A. (2009) · Journal of Financial Economics · doi:10.1016/j.jfineco.2009.01.001 · Cited by 417
Metadata
- Authors
- Christensen, B. J., & Prabhala, N. R.
- Venue
- Journal of Financial Economics
- Publisher
- Elsevier BV
- Published
- 1998-11
- Volume
- 50
- Issue
- 2
- Pages
- 125-150
- ISSN
- 0304-405X (ISSN-L)
- OpenAlex
- W1594842258
- Cited by
- 1,112
- References
- 2
- FWCI
- 42.86
- Type
- journal article
- Language
- en
- Open access
- hybrid
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- Christensen, B. J., & Prabhala, N. R. (1998). The relation between implied and realized volatility. Journal of Financial Economics. https://doi.org/10.1016/s0304-405x(98)00034-8
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Bibliographic data: Semantic Scholar, OpenAlex, Crossref.
Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
