Implied volatility indices – A review

Document Type

Article

Source of Publication

Quarterly Review of Economics and Finance

Publication Date

1-1-2020

Abstract

© 2020 Board of Trustees of the University of Illinois This study tests and documents the information content of all publicly available implied volatility indices regarding both the realized volatility and the returns of the underlying asset. These topics present a path traveled by earlier work, but there are gains in studying together all 47 volatility-based indices that are now available, in order to examine if different asset classes and financial instruments could possess different return-volatility relations and forecasting ability. Our findings suggest that implied volatility includes information about future volatility beyond that contained in past volatility; this finding is consistent across all assets under review. Furthermore, we find a significant contemporaneous relationship between implied volatility changes and underlying returns, but at the same time, we show that implied volatilities in commodities, bonds, currencies and volatility react differently to underlying price changes compared to equities. Hence, our findings have important implications for asset allocation, risk management and asset pricing.

ISSN

1062-9769

Publisher

Elsevier B.V.

Disciplines

Business

Keywords

Implied volatility indices, Quantile regression, Realized volatility, Risk-return relationship, VIX

Scopus ID

85087962480

Indexed in Scopus

yes

Open Access

no

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