The Information Content of VFTSE

Abstract

The FTSE 100 Volatility Index (VFTSE) reflects the market expectations of the future monthly volatility of the UK benchmark equity index, FTSE100. VFTSE is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. This study tests and documents the information content of VFTSE regarding both the realized volatility and the returns of the underlying equity index.

The empirical findings suggest that VFTSE includes information about future volatility beyond that contained in past volatility and in addition show that there is a statistically significant negative and asymmetric contemporaneous relationship between implied volatility changes and the underlying equity index returns.

Keywords: Implied volatility indices, London Stock Exchange, forecasting volatility, VFTSE

JEL Classification: G14, G15, G17, C53