Implied Volatility Indices – A Review

Abstract

This study tests and documents the information content of all publicly available implied volatility indices regarding both the realized volatility and the returns of the underlying asset. These topics present a path traveled by earlier work, but there are gains in studying together all 50 volatility-based indices that are now available, in order to examine if different asset classes and financial instruments could possess different return-volatility relations and forecasting ability.
Our findings suggest that implied volatility includes information about future volatility beyond that contained in past volatility; this finding is consistent across all assets under review. Furthermore, we find a significant contemporaneous relationship between implied volatility changes and underlying returns, but at the same time, we show that implied volatilities in commodities, bonds, currencies and volatility react differently to underlying price changes compared to equities. Hence, our findings have important implications for asset allocation, risk management and asset pricing.

Keywords: implied volatility, implied volatility indices, transmission of uncertainty, VIX

JEL Classification: G13, G14, G15, C53