The information content of implied volatilities and model-free volatility expectations : evidence from options written on individual stocks
Journal of Banking and Finance
Volatility, Stock options, Information content, Implied volatility, Model-free volatility expectations, ARCH models
We measure the volatility information content of stock options for individual firms using option prices for 149 US firms and the S&P 100 index. We use ARCH and regression models to compare volatility forecasts defined by historical stock returns, at-the-money implied volatilities and model-free volatility expectations for every firm. For 1-day-ahead estimation, a historical ARCH model outperforms both of the volatility estimates extracted from option prices for 36% of the firms, but the option forecasts are nearly always more informative for those firms that have the more actively traded options. When the prediction horizon extends until the expiry date of the options, the option forecasts are more informative than the historical volatility for 85% of the firms. However, at-the-money implied volatilities generally outperform the model-free volatility expectations.
Copyright © 2009 Elsevier B.V
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Taylor, S. J., Yadav, P. K., & Zhang, Y. (2010). The information content of implied volatilities and model-free volatility expectations: Evidence from options written on individual stocks. Journal of Banking & Finance, 34(4), 871-881. doi: 10.1016/j.jbankfin.2009.09.015