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The relationship between implied and realized volatility : evidence from the Australian stock index option market

Li, Steven & Yang, Qianqian (2009) The relationship between implied and realized volatility : evidence from the Australian stock index option market. Review of Quantitative Finance and Accounting, 32(4), pp. 405-419.

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Abstract

This paper examines the relationship between the volatility implied in option prices and the subsequently realized volatility by using the S&P/ASX 200 index options (XJO) traded on the Australian Stock Exchange (ASX) during a period of 5 years. Unlike stock index options such as the S&P 100 index options in the US market, the S&P/ASX 200 index options are traded infrequently and in low volumes, and have a long maturity cycle. Thus an errors-in-variables problem for measurement of implied volatility is more likely to exist. After accounting for this problem by instrumental variable method, it is found that both call and put implied volatilities are superior to historical volatility in forecasting future realized volatility. Moreover, implied call volatility is nearly an unbiased forecast of future volatility.

Impact and interest:

4 citations in Scopus
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ID Code: 32423
Item Type: Journal Article
Additional URLs:
Keywords: Index options, Implied volatility, Realized volatility
DOI: 10.1007/s11156-008-0099-2
ISSN: 0924-865X
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BANKING FINANCE AND INVESTMENT (150200) > Finance (150201)
Divisions: Current > Schools > School of Curriculum
Past > QUT Faculties & Divisions > Faculty of Science and Technology
Copyright Owner: Copyright 2009 Springer New York LLC
Copyright Statement: The original publication is available at www.springerlink.com
Deposited On: 03 Jun 2010 08:48
Last Modified: 25 Mar 2013 18:11

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