The Quality of Market Volatility Forecasts Implied by S&P 100 Index Option Prices (1997)
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@MISC{Fleming97thequality,
author = {Jeff Fleming},
title = {The Quality of Market Volatility Forecasts Implied by S&P 100 Index Option Prices},
year = {1997}
}
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Abstract
This study examines the performance of the S&P100impliedvolatility as a forecast of future stockmarket volatility. The results indicate that the implied volatility is an upward biased forecast, but also that it contains relevantinformation regarding future volatility. The implied volatility dominates the historical volatility rate in termsofex ante forecasting power, and its forecast error is orthogonal to parameters frequentlylinked to conditional volatility,including those employed invarious ARCH specifications. These findings suggest that a linear model which corrects for the implied volatility'sbias can provideauseful market-based estimator of conditional volatility. JEL Classification:G12, G13 Keywords:Volatility,Options, Forecasting, Implied volatility, Information content 3 Address correspondence to Jeff Fleming, Jones Graduate School--MS 531, Rice University,6100 Main Street, Houston, TX 77005-1892, phone (713) 527-4677, e-mail jfleming@rice.edu. 1. Introduction The fundamen...
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