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

Becker, Ralf, Clements, Adam, & McClelland, Andrew (2009) The jump component of S&P 500 volatility and the VIX index. Journal of Banking and Finance, 33(6), pp. 1033-1038.

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Abstract

Much 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.

Impact and interest:

33 citations in Scopus
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29 citations in Web of Science®

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ID Code: 32244
Item Type: Journal Article
Additional URLs:
Keywords: Implied volatility, VIX, Volatility forecasts, Informational efficiency, Jumps
DOI: 10.1016/j.jbankfin.2008.10.015
ISSN: 3078-4266
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Econometric and Statistical Methods (140302)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2009 Elsevier
Deposited On: 24 May 2010 09:06
Last Modified: 01 Mar 2012 00:04

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