Implied Volatility Forecasting in the Options Market: A Survey

Abstract

Implied volatility is regarded as one of the most important variables for determining profitability in options trading. Implied volatility gives indication about the future volatility of the underlying asset and can be used to predict the degree to which the asset price might swing and thus whether the options could become profitable before expiration. Volatility forecasting can be grouped into two main categories namely option-implied volatility and historical time-series models. There is an academic debate as to which of the two methods has stronger predictive power. In this paper, we provide a review of options-implied volatility forecasting studies. This survey of the literature suggests there is no consensus to indicate that the implied volatility has stronger predictive power than historical time series in forecasting realized volatility.Keywords: Implied volatility; historical volatility; options; forecasting; literature review AbstrakVolatiliti implisit dianggap sebagai salah satu pembolehubah yang paling penting untuk menentukan keuntungan dalam perdagangan opsyen. Volatiliti implisit memberikan gambaran tentang turun naik harga pasaran aset sandaran masa depan. Ia juga boleh digunakan untuk meramalkan sejauh mana harga aset mungkin berubah, justeru itu ia memberi maklumat mengenai opsyen yang boleh memberi keuntungan sebelum tamat tempoh hayatnya. Ramalan volatiliti boleh dikategorikan ke dalam dua kumpulan utama iaitu volatiliti implisit-opsyen dan volatiliti dari model siri masa. Terdapat perdebatan akademik antara kedua-dua kaedah ramalan tersebut, yang manakah mempunyai kuasa ramalan kuat. Dalam kertas ini, kami menyediakan survei mengenai kajian volatiliti implisit-opsyen. Tinjauan litratur mencadangkan tidak ada kata sepakat untuk menunjukkan bahawa volatiliti implisit mempunyai kuasa ramalan lebih baik berbanding volatiliti dari model siri masa untuk menentukan volatiliti semasa.Kata Kunci: Volatiliti implisit; volatiliti dari model siri masa; opsyen, ramalan, tinjauan litratur. © 2016 Penerbit UTM Press. All rights reserved 1.0 INTRODUCTIONVolatility has been one of the main topics of discussion in finance over the years, and volatility forecasting is the main building block in finance research on topics such as option pricing, portfolio selection, and risk management. However, it is extremely difficult to predict volatility accurately. Volatility is basically the rate of change of a certain financial product's price, irrespective of the direction of the movement. A trader needs to understand or have an idea of how the price of a financial product will change and the volatility can assist him or her to forecast movements in the prices of any financial product. In terms of options, the most practical aspect of volatility is related to options strategies and prices, where it creates the opportunity for the trader to determine relative valuations of options. Knowing which options are cheap or expensive, the trader knows when to buy or sell them.Volatility forecasting can be broadly classi...

Multistep forecast of the implied volatility surface using deep learning

“…Both measures of volatility are closely connected via the notion of volatility (variance) risk premium, namely their difference. In this study we aim to directly predict IV for the SPX options across the entire surface, that is, IV across strikes and maturities, as opposed to RV commonly seen in the literature (see Samsudin & Mohamad, 2016, for a recent survey).…”