Volatility is an important variable in the
financial market. We propose a model-free implied volatility method to measure
the volatility and test the volatility risk premium. The model-free implied
volatility does not depend on the option pricing model, and extracts
information from all the option contracts. We provide empirical evidence from
the S & P 500 index option that model-free implied volatility is more
accurate to forecast the future volatility and the volatility risk premium does
not exist.
References
[1]
Engle, R.F. (1982) Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50, 987-1007. http://dx.doi.org/10.2307/1912773
[2]
Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307- 327. http://dx.doi.org/10.1016/0304-4076(86)90063-1
[3]
Taylor, S.J. (1986) Modeling Financial Time Series. John Wiley & Sons, New York.
[4]
DuPire, B. (1994) Pricing with a Smile. Risk, 7, 18-20.
[5]
Neuberger, A. (1994) The Log Contract. Journal of Portfolio Management, 20, 74-80.
http://dx.doi.org/10.3905/jpm.1994.409478
[6]
Demeterfi, K. (1999) A Guide to Volatility and Variance Swap. Journal of Derivatives, 6, 9-32.
http://dx.doi.org/10.3905/jod.1999.319129
[7]
Demeterfi, K. (1999) More than You Ever Wanted to Know about Volatility Swaps. Goldman Sachs Quantitative Strategies Research Note.
[8]
Britten-Jones, M. and Neuberger, A. (2000) Option Prices, Implied Price Processes, and Stochastic Volatility. Journal of Finance, 55, 839-866. http://dx.doi.org/10.1111/0022-1082.00228
[9]
Jiang, G.J. and Tian, Y.S. (2005) The Model-Free Implied Volatility and Its Information Content. The Review of Financial Studies, 18, 1305-1342. http://dx.doi.org/10.1093/rfs/hhi027
[10]
Jiang, G.J. and Tian, Y.S. (2007) Extracting Model-Free Volatility from Option Prices: An Examination of the VIX Index. Journal of Derivatives, 14. http://dx.doi.org/10.3905/jod.2007.681813
[11]
Tsay, R.S. (2005) Analysis of Financial Time Series. John Wiley & Sons. http://dx.doi.org/10.1002/0471746193
