On the predictive power of implied volatility indexes: A comparative analysis with GARCH forecasted volatility

Bentes, Sonia R and Menezes, Rui (2012): On the predictive power of implied volatility indexes: A comparative analysis with GARCH forecasted volatility.

Abstract

This paper examines the behavior of several implied volatility indexes in order to compare them with the volatility forecasts obtained from estimating a GARCH model. Though volatility has always been a prevailing subject of research it has become particularly relevant given the increasingly complexity and uncertainty of stock markets in these days. An important measure to assess the market expectations of the future volatility of the underlying asset is the implied volatility (IV) indexes. Generally, these indexes are calculated based on the prices of out-of-the money put and call options on the underlying asset. Sometimes called the “investor fear gauge”, the IV indexes are a measure of the implied volatility of the underlying index. This study focuses on the implied and GARCH forecasted volatility of some emerging countries and some developed countries. More specifically, it compares the predictive power of the IV indexes with the ones provided by standard volatility models such as the ARCH/GARCH (Autoregressive Conditional Heteroskedasticity Model/ Generalized Autoregressive Conditional Heteroskedasticity Model) type models. Finally, a debate of the results is also provided.

• Item Type: MPRA Paper
• Language: English
• Keywords: implied volatility; volatility forecasts, GARCH models, volatility indices
• Subjects: F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

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