FTSE-100 Implied Volatility Index

Abstract:     
Three different methodologies to construct the UK implied volatility index (VFTSE) are suggested using high-frequency data on FTSE-100 index options. We consider construction methodologies similar to the VXO volatility measure based on the S&P 100 options and to the VIX model-free volatility measure based on the S&P 500 options.

A detailed description of the database and some stylised facts about the FTSE-100 option implied volatilities are presented. An analysis of the statistical properties of the volatility indices that result from the use of diïB00erent construction methodologies is performed as well as the analysis of their forecasting ability.

We found that the realised volatility measure constructed using high-frequency data on FTSE-100 index futures is the best forecast of future 22 trading day volatility. All the volatility indices with the exception of one perform similarly well. Among the indices that show to have good information content the volatility index with the best statistical properties is chosen as the VFTSE index. An analysis of the VFTSE and its statistical properties is performed, where it is shown that the VFTSE series also exhibits long memory effects which can effectively be removed by using a filtering scheme.

Keywords: volatility, volatility indices, forecasting volatility, long memory

JEL Classifications: G10, g15, C53

Working Paper Series