The Information Content of Implied Volatility: Evidence from Australia

38 Pages Posted: 27 Aug 2008

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Christian Tallau

Münster University of Applied Sciences

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Date Written: August 22, 2008

Abstract

In this paper we develop and evaluate the information content of an implied volatility index for the Australian stock market. Using price data on S&P/ASX 200 index options and SFE SPI 200 index futures options, we develop implied volatility indices with a time to maturity of three months and one month, respectively. When evaluating the information content of both implied volatility indices we find that the implied volatility index based on the S&P/ASX 200 index options with a three-month horizon is most informative in terms of explaining stock market returns and forecasting future volatility. For this implied volatility index we find a significant negative and asymmetric relationship between changes in implied volatility and S&P/ASX 200 returns, i.e., stock market prices decline more when implied volatility increases than they increase when implied volatility drops. When evaluating the forecasting power of implied volatility for future market volatility we find that the implied volatility index based on the S&P/ASX 200 index options contains important information both insample and out-of-sample. In-sample, the implied volatility index significantly improves the fit of a GJR-GARCH(1, 1) model. Out-of-sample, we find that the implied volatility index significantly outperforms the RiskMetrics and GJR-GARCH(1, 1) model, with its highest forecasting power at the one-month forecasting horizon.

Keywords: Implied Volatility, Volatility Forecasting, Options

JEL Classification: C22, G10

Suggested Citation

Frijns, Bart and Tallau, Christian and Tourani-Rad, Alireza, The Information Content of Implied Volatility: Evidence from Australia (August 22, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1246142 or http://dx.doi.org/10.2139/ssrn.1246142

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Christian Tallau

Münster University of Applied Sciences ( email )

Corrensstrasse 25
Muenster, 48149
Germany

Alireza Tourani-Rad (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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