Does implied volatility provide any information beyond that captured in model-based volatility forecasts?

Abstract

This paper contributes to our understanding of the informational content of implied volatility. Here we examine whether the S&P 500 implied volatility index (VIX) contains any information relevant to future volatility beyond that available from model based volatility forecasts. It is argued that this approach differs from the traditional forecast encompassing approach used in earlier studies. The findings indicate that the VIX index does not contain any such additional information relevant for forecasting volatility.

Dynamics of the Relationship between Implied Volatility Indices and Stock Prices Indices: The Case of European Stock Markets

“…Therefore volatility index is not the best measure for forecasting future volatility of the US stock market. Similarly, Becker et al (2007) through a study conducted during the period from 2 January 1990 to 17…”

“…Hence, the second hypothesis H2 is invalidated except in this case. These estimation results from different GARCH specifications may be justified by the fact that options contracts for underlying stocks indices are inefficient as advanced by Martens and Zein (2004 combination of GARCH and implied volatility indices respond to the needs of forecasting future volatility in European stock markets, see Day and Lewis (1992); Blair et al (2001) and Becker et al (2007).…”

Effects of the US Stock Market Return and Volatility on the VKOSPI

“…The VIX, the most well-known volatility index of the US market, plays a successful role as a market indicator and fear gauge measure. Numerous articles that examine the fitting and forecasting ability of the US' implied volatility index demonstrate its superiority over historical volatilities (Banerjee et al, 2007;Becker et al, 2007;Carr and Wu, 2006;Corrado and Miller, 2005;Frijns et al, 2010;Jiang and Tian, 2007;Konstantinidi et al, 2008;Simon, 2003). Some studies also investigate implied volatility indices for quantifying market risk and for risk management purposes (Giot, 2005;Kim and Ryu, 2015b).…”

The Forecasting Power of the Volatility Index: Evidence from the Indian Stock Market

“…Poon and Granger (2003) conclude that the construction of VIX is a good tool for model-based forecasting. In contrast, the study of Becker et al (2006) rejects the notion that it contains any information for volatility forecasting. However, after a more detailed study, specifically examining the forecast performance of VIX, Becker and Clemens (2007) conclude that it is a superior predictor of market volatility.…”