TY - JOUR
T1 - Investigating the information content of the model-free volatility expectation by Monte Carlo methods
AU - ZHANG, Yuanyuan
AU - TAYLOR, Stephen J.
AU - WANG, Lili
N1 - Zhang gratefully acknowledges the financial support from the Research Committee of Lingnan University (grant no. DB09A2).
PY - 2013/11
Y1 - 2013/11
N2 - We explore the impact of both the number of option prices and the measurement errors in option prices upon the information content of the model-free volatility expectation, and compare it with the Black–Scholes at-the-money (ATM) implied volatility. We simulate the realized volatility process and option prices using Heston's price dynamics and option valuation formula. The results show that the model-free volatility expectation always contains important information about future realized volatilities. When the option prices contain random measurement noise, the informational efficiency of the model-free volatility expectation increases monotonically with the number of out-of-the-money options. The model-free volatility expectation outperforms the ATM implied volatility, except when there are only a few option price observations. For the traded strikes for SandP 500 index options, we further show that fitting implied volatility curves before applying the current CBOE procedure for constructing the VIX index can improve the VIX's efficiency when forecasting future realized volatilities.
AB - We explore the impact of both the number of option prices and the measurement errors in option prices upon the information content of the model-free volatility expectation, and compare it with the Black–Scholes at-the-money (ATM) implied volatility. We simulate the realized volatility process and option prices using Heston's price dynamics and option valuation formula. The results show that the model-free volatility expectation always contains important information about future realized volatilities. When the option prices contain random measurement noise, the informational efficiency of the model-free volatility expectation increases monotonically with the number of out-of-the-money options. The model-free volatility expectation outperforms the ATM implied volatility, except when there are only a few option price observations. For the traded strikes for SandP 500 index options, we further show that fitting implied volatility curves before applying the current CBOE procedure for constructing the VIX index can improve the VIX's efficiency when forecasting future realized volatilities.
UR - http://commons.ln.edu.hk/sw_master/523
UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-84882279370&doi=10.1002%2ffut.21570&partnerID=40&md5=e9bd97a10d145cb9b6fb62d2461abc31
U2 - 10.1002/fut.21570
DO - 10.1002/fut.21570
M3 - Journal Article (refereed)
SN - 0270-7314
VL - 33
SP - 1071
EP - 1095
JO - Journal of Futures Markets
JF - Journal of Futures Markets
IS - 11
ER -