Relationship Between Implied and Realized Volatility of S&P CNX Index in India

21 Pages Posted: 27 Nov 2009 Last revised: 29 Feb 2012

See all articles by Siba Prasda Panda

Siba Prasda Panda

TransMarket Group Research (India) Pvt. Ltd., Mumbai

Niranjan Swain

Birla Institute of Technology & Science (BITS), Pilani

Davinder K. Malhotra

Thomas Jefferson University

Date Written: April 1, 2008

Abstract

Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. According to the efficient market hypothesis, since implied volatilities are calculated based upon today’s pricing information, they contain the best information about the market. Therefore, implied volatilities are considered as the best representation of market expectations. Recently, Christensen and Prabhala (1998) found that implied volatility in “at-the-money” one month OEX call options on S&P 100 index is an unbiased and efficient forecast of ex-post realized index volatility after the 1987 stock market crash. In this paper, we examine the information content of call and put options on the S&P CNX Nifty index. We examine one month at-the-money call option from 4-June-2001 to 28-oct-2004. We find that implied volatility contains more information than past realized volatility. In other words the predictability of implied volatility is more than that of past realized volatility. In fact, implied volatility remains significant even in the multiple regressions where historical volatility is included. Thus, we find that it is an efficient albeit slightly biased estimator of realized return volatility.

Keywords: Implied Volatility, Realized Volatility, Two Stage Least Square

JEL Classification: C22, C53, G10

Suggested Citation

Panda, Siba Prasda and Swain, Niranjan and Malhotra, Davinder K., Relationship Between Implied and Realized Volatility of S&P CNX Index in India (April 1, 2008). Frontiers in Finance and Economics, Vol. 5, No. 1, pp. 85-105, April 2008. Available at SSRN: https://ssrn.com/abstract=1512552

Siba Prasda Panda (Contact Author)

TransMarket Group Research (India) Pvt. Ltd., Mumbai ( email )

Mumbai
India
x (Phone)
x (Fax)

Niranjan Swain

Birla Institute of Technology & Science (BITS), Pilani ( email )

Pilani Campus
Vidya Vihar
Pilani, Rajasthan 333 031
India

Davinder K. Malhotra

Thomas Jefferson University ( email )

Schoolhouse Lane and Henry Avenue
School of Business Administration
Philadelphia, PA 19144
United States

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