Forecasting Power of Implied Volatility: Evidence from Individual Equities

23 Pages Posted: 1 Aug 2005

See all articles by Jonathan M. Godbey

Jonathan M. Godbey

Georgia State University - Department of Finance

James W. Mahar

Saint Bonaventure University - Department of Finance

Date Written: July 14, 2005

Abstract

Assuming use of the correct option pricing model and an efficient market, an option's implied volatility is the market's consensus forecast of future realized volatility over the remaining life of that option. We examine 460 of the S&P 500 firms to demonstrate that 1) implied volatility is a better forecaster of realized volatility than historic volatility or GARCH models and 2) the information content of implied volatility significantly decreases with liquidity. Since individual equity options are American style, we obtain implied volatility from calls and puts separately rather than only calls or pooled data.

Keywords: Implied volatilty, realized volatilty, option volume

JEL Classification: C53, G14

Suggested Citation

Godbey, Jonathan M. and Mahar, James William, Forecasting Power of Implied Volatility: Evidence from Individual Equities (July 14, 2005). Available at SSRN: https://ssrn.com/abstract=762644 or http://dx.doi.org/10.2139/ssrn.762644

Jonathan M. Godbey

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States

James William Mahar (Contact Author)

Saint Bonaventure University - Department of Finance ( email )

St. Bonaventure, NY 14778
United States
716-375-2359 (Phone)

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