The Predictive Power of Implied Volatility of Options Traded OTC and on Exchanges

36 Pages Posted: 8 Dec 2008 Last revised: 29 Jul 2015

See all articles by Wayne Yu

Wayne Yu

City University of Hong Kong

Evans Lui

The Chinese University of Hong Kong (CUHK) - Department of Finance

Jacqueline Wang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: December 5, 2008

Abstract

This paper investigates the efficiency of stock index options traded over-the-counter (OTC) and on the exchanges in Hong Kong and Japan. Our findings suggest that implied volatility is superior to either historical volatility or a GARCH-type volatility forecast in predicting future volatility in both the OTC and exchange markets. We also compare the predictive power of the implied volatility of options traded OTC to that of exchange-traded options and find evidence that the OTC market is more efficient than the exchange in Japan, but that the opposite is true in Hong Kong.

Keywords: Implied Volatility, Predictive Power, Historical Volatility, Index Options, Over-the-Counter

JEL Classification: G13, G14

Suggested Citation

Yu, Wayne and Lui, Evans and Wang, Jacqueline, The Predictive Power of Implied Volatility of Options Traded OTC and on Exchanges (December 5, 2008). Journal of Banking and Finance, Vol. 34, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1311766 or http://dx.doi.org/10.2139/ssrn.1311766

Wayne Yu (Contact Author)

City University of Hong Kong ( email )

Kowloon
Hong Kong

Evans Lui

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Jacqueline Wang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

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