The Model-Free Implied Volatility and Its Information Content
Author | : George J. Jiang |
Publisher | : |
Total Pages | : 38 |
Release | : 2013 |
ISBN-10 | : OCLC:1309069312 |
ISBN-13 | : |
Rating | : 4/5 (12 Downloads) |
Book excerpt: Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor's 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black-Scholes (B-S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.