Journal of Money, Investment and Banking, No. 4, 2008
15 Pages Posted: 11 Apr 2011
Date Written: 2008
Implied volatility index of the S&P500 is considered as a dependent variable in a fractionally integrated ARMA model, whereas volatility measures based on interday and intraday datasets are considered as explanatory variables. The next trading day’s implied volatility forecasts provide positive average daily profits. All the forecasting information is provided by the VIX index itself. There is no incremental predictability from both realized volatility computed from intraday data and conditional volatility extracted from an Arch model. Hence, neither the interday volatility nor the use of intraday data yield any added value in forecasting the S&P 500 implied volatility index. However, an agent cannot utilize VIX predictions in creating abnormal returns in implied volatility futures market.
Keywords: ARCH, ARFIMAX, Fractional Integration, Volatility Forecasting, VIX Index
JEL Classification: C32, C52, C53, G15
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