Model-Free Implied Volatility, Its Time-Series Behavior And Forecasting Ability

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Several widely acknowledged stylized statistical facts about the performance of volatility were observed during the analysis. First, the volatility exhibits mean-reversion towards its long-run mean. Second, certain skewness is present in the volatility response to changing market circumstances – falling markets raise volatility more substantially, than rising markets diminish the expected volatility. Results of this study signify that even though there exists a strong relationship between both volatility measures for SMI and EURO STOXX 50, the implied volatility values lay above the historical volatility values most of the time, whereas the latter is more scattered and volatile. Finally, we conclude based on the OLS results, that model-free implied volatility has no significant relationship with the future realized volatility and thus cannot be used as a market forecast of future volatility index.

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