Model-Free Volatility Indexes in the Financial Literature: A Review

González-Pérez, María T.

doi:10.2139/ssrn.2332710

Cited by 8 publications

(10 citation statements)

References 108 publications

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“…Andersen et al [10] considered a novel Corridor Implied Volatility index (CX) based on a range of strikes with high-frequency data including jumps and asymmetries. For more information about model-free volatility indices, see Gonzalez-Perez [11].…”

Section: Introductionmentioning

confidence: 99%

Estimation of Tail Risk and Moments Using Option Prices with a Novel Pricing Model under a Distorted Lognormal Distribution

Chen

Cai

Zheng

2020

Mathematical Problems in Engineering

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Risk measures based on the trading option prices in the market are forward-looking, such as VIX. We propose a new method combining distorted lognormal distribution with interpolation to price options accurately and then estimate tail risk. Our method can price the option of any strikes between the maximum and the minimum value of strikes in the real market, which reduces the instability and inaccuracy of using the limited option to measure the risk. In addition, our novel method treats the underlying asset price as a stochastic indicator rather than a fixed indicator as described in previous research studies for risk measurement. Moreover, even if the available sample size is very small, we can measure the risk stably and precisely after interpolation. Finally, the empirical test results of SP500 market show that this method has good performance, especially for the option markets with sparse strikes.

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Section: Introductionmentioning

confidence: 99%

Estimation of Tail Risk and Moments Using Option Prices with a Novel Pricing Model under a Distorted Lognormal Distribution

Chen

Cai

Zheng

2020

Mathematical Problems in Engineering

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“…Option-implied volatility continues to occupy a prominent role as an information source in forecasting future asset return volatility; see Figlewski (1997), Poon & Granger (2003), Gonzalez-Perez (2015) for a review. The rationale behind the argument that implied volatility reflects a fair market expectation of future asset return volatility is the belief that financial markets are informationally efficient: as riskhedging instruments, options impound all the information about market participants' view on the future return volatility, and markets make efficient forecasts based on the available information.…”

Section: Introductionmentioning

confidence: 99%

The Information Content of Corridor Implied Variances and Their Economic Difference in the DJX Options Market

2017

SSRN Journal

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This paper investigates the ability of corridor implied variances (CIV) with different corridors to forecast conditional volatility of DJIA index returns, and compares their performance with a CBOE volatility index, VXD, by employing several GARCH models in a model-based out-of-sample context. Besides, it explores the reasons behind the differences in the forecasting ability of CIVs and VXD through a decomposition of the model-free implied volatility. In addition, it addresses the economic difference among aforementioned implied volatility measures in a simulated options market. We find that narrow-corridor CIVs outperform wide-corridor CIVs and VXD in terms of the forecasting ability, as wide-corridor CIVs and VXD impound information from deep out-of-the-money options whose prices contain large volatility risk premiums and may not reflect a fair market expectation of volatility. In the economic sense, wide-corridor CIVs and VXD outperform narrow-corridor CIVs in turbulent periods, while narrow-corridor CIVs outperform wide-corridor CIVs and VXD in medium-and low-volatility periods. The profitability pattern is consistent both in-sample and out-of-sample, before and after transaction costs are considered, and is also robust to option strategy choices.

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“…There is an abundance of literature about the VIX index and its uses. This literature can be roughly classified into five categories (see Gonzalez‐Perez, for an excellent survey). A first group of articles, based on Whaley () and others, investigates the financial leverage effect i.e., the negative correlation between stock returns and volatility.…”

Section: Introductionmentioning

confidence: 99%

The Role of the Conditional Skewness and Kurtosis in VIX Index Valuation

Lalancette

Simonato

2016

Euro Fin Management

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The CBOE VIX index is a widely recognised benchmark measure of expected stock market volatility. As shown in the literature, probability distributions other than Gaussian are key features required to describe the dynamics of the S&P 500, the variable that ultimately determines the VIX index level. As such, it is important to assess if deviations from the Gaussian distribution have important impacts on the VIX index level. We examine herein how a model articulated over a time‐varying non‐Gaussian distribution with conditional skewness and kurtosis can contribute to the overall explanation of the VIX dynamics.

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Model-Free Volatility Indexes in the Financial Literature: A Review

Cited by 8 publications

References 108 publications

Estimation of Tail Risk and Moments Using Option Prices with a Novel Pricing Model under a Distorted Lognormal Distribution

Estimation of Tail Risk and Moments Using Option Prices with a Novel Pricing Model under a Distorted Lognormal Distribution

The Information Content of Corridor Implied Variances and Their Economic Difference in the DJX Options Market

The Role of the Conditional Skewness and Kurtosis in VIX Index Valuation

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