The jump component of S&P 500 volatility and the VIX index

Abstract

a b s t r a c tMuch research has investigated the differences between option implied volatilities and econometric model-based forecasts. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing of past volatility to generate forecasts. Implied volatility has the potential to reflect information that a model-based forecast could not. This paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information pertaining to future jump activity relative to model-based forecasts. It is found that the VIX index both subsumes information relating to past jump contributions to total volatility and reflects incremental information pertaining to future jump activity. This issue has not been examined previously and expands our understanding of how option markets form their volatility forecasts.

Risk spillovers in oil-related CDS, stock and credit markets

“…Becker et al (2009) examined two issues relating to the informational content of the VIX implied volatility index. One relates to whether it subsumes information on how historical jump activity contributed to the price volatility, and the other one pertains to whether VIX reflects any incremental information pertaining to future jump activity relative to modelbased forecasts.…”

Stock Returns and Implied Volatility: A New VAR Approach

“…Given that the KOSPI200 index options are top-tier options products due to their high trading volume and investor interest, there is good _________________________ 2 If we derive implied volatility from option pricing models, it contains some model bias, of which representative examples are volatility smiles or smirks of the Black-Scholes model. 3 See the recent studies of Giot (2005aGiot ( , 2005b, Banerjee, Doran, and Peterson (2007), Becker, Clements, andMcCelland (2009), andDuan andYeh (2010). 4 Some recent studies, such as Ryu (2008, 2010), Ryu (2011), and Kim and Ryu (2012), have begun to address the market microstructure issues of the KOSPI200 options market.…”

Risky Adjustments or Adjustments to Risks: Decomposing Bank Leverage

“…To proxy risks on equity markets, I resort to the VIX index. The Chicago Board of Options Exchange computes this implied volatility index from a number of put and call options on the S&P 500 index (see Becker et al 2009). Ang et al (2009) link VIX innovations to the cross section of equity returns as the VIX reflects equity market volatility and its price (see Adrian and Shin, 2010).…”