Do Implied Volatilities Provide Early Warning of Market Stress?

The RiskMetrics Group Working Paper No. 00-01

26 Pages Posted: 10 Mar 2000

Date Written: February 2000

Abstract

Implied volatility can signal that market turmoil has become more likely in the near future. Statistical evidence is presented indicating that implied volatility contains information regarding future large-magnitude returns which is not contained in other risk measures. Large moves in asset prices are often preceded by significant increases in implied volatility. A practical warning signal based on implied volatility that can help risk managers posture themselves for stress events is developed.

JEL Classification: F3, G13, G14

Suggested Citation

Malz, Allan M., Do Implied Volatilities Provide Early Warning of Market Stress? (February 2000). The RiskMetrics Group Working Paper No. 00-01, Available at SSRN: https://ssrn.com/abstract=211448 or http://dx.doi.org/10.2139/ssrn.211448

Allan M. Malz (Contact Author)

The RiskMetrics Group ( email )

44 Wall Street
New York, NY 10005
United States
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