Title

The information content of implied volatilities and model-free volatility expectations : evidence from options written on individual stocks

Document Type

Journal article

Source Publication

Journal of Banking and Finance

Publication Date

4-1-2010

Volume

34

Issue

4

First Page

871

Last Page

881

Keywords

Volatility, Stock options, Information content, Implied volatility, Model-free volatility expectations, ARCH models

Abstract

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.

DOI

10.1016/j.jbankfin.2009.09.015

Print ISSN

03784266

E-ISSN

18726372

Publisher Statement

Copyright © 2009 Elsevier B.V

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

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