Elsevier

Journal of Financial Economics

Volume 50, Issue 2, 1 November 1998, Pages 125-150
Journal of Financial Economics

The relation between implied and realized volatility1

https://doi.org/10.1016/S0304-405X(98)00034-8Get rights and content
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Abstract

Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications. Our results differ from previous studies because we use longer time series and nonoverlapping data. A regime shift around the October 1987 crash explains why implied volatility is more biased in previous work.

JEL classification

G13
G14
C53

Keywords

Options
Volatility
Stock market crash
Information
Market efficiency

Cited by (0)

1

We thank Interactive Data Corporation for providing the option price data used in this study, and David Bates, N.K. Chidambaran, Young–Ho Eom, Steven Feinstein, Stephen Figlewski, Ken French, Will Goetzmann, Bob Jarrow, Nikunj Kapadia, Cheng–Few Lee, K. Geert Rouwenhorst, Chris Sims, Suresh Sundaresan, Zhen Yu Wang, seminar participants at the American Finance Association, Boston University, European Finance Association, Financial Management Association, and the Cornell–Queens Derivative Securities Conference for useful comments. We are also grateful to G. William Schwert (the editor) and an anonymous referee for very extensive and helpful feedback.