On the Linkages among Ex-ante and Ex-post Volatility: Evidence from NSE Options Market (India)

Abstract

This article investigates the cointegration level, and changes in the existence and direction of causality among volatilities. Vector autoregressive (VAR) model enables us to conduct Granger-causality and impulse response analysis, and determine the pattern of causality. The empirical findings uncover that ex-ante volatility best impounds the market-wide information to explain the ex-post volatility. Vector autoregression results make clear that unidirectional causality exists among ex-ante and ex-post volatilities. Impulse response analysis explains that realized volatility declines significantly initially in the first two periods and remains constant for all other periods. Findings, emphasizes that implied volatility is more informative on volatility forecasting, useful for successful volatility traders and pricing of options.

The implied volatility index: Is ‘investor fear gauge’ or ‘forward-looking’?

“…These are the prima facie evidences show that implied volatility is the forward-looking and it is the expectation of the future stock market volatility. The standard deviation of VOL t is 16.46 which is more than the IVIX t , this implies that realized volatility is more volatile, and we can conclude that the implied volatility is the smoothed expectation (e.g., Christensen & Prabhala, 1998;Hansen, 2001;Shaikh & Padhi, 2013a, 2013b of stock market volatility. It is seen that during crises period, the average implied volatility appears to be 39.06%, which is higher than the normal rage (e.g., 15e30%, Whaley, 2000), and the standard deviation of VOL t is also higher than the IVIX t , and the correlation between two volatility do not appear statistically significant.…”

“…The study on the information content of implied volatility as the forecast of the future stock market volatility (e.g. Christensen & Prabhala, 1998;Christensen & Hansen, 2002;Hansen, 2001;Li & Yang, 2009;Shaikh & Padhi, 2013a, 2013b, 2014 has shown that monthly time series values are the best measure of future realized volatility. The rationale behind converting daily data into monthly is to control the problem of autocorrelation.…”

The information content of implied volatility index (India VIX)

“…Our aim of the study is to show that how ex-ante volatility (VIX) contains the information about the ex-post volatility (realized volatility) of the stocks. Unlike the previous studies (Christensen and Prabhala 1998;Christensen and Hansen 2002;Li and Yang 2009;Shaikh and Padhi 2013), our study is based on the implied volatility index (India VIX, herein after IVIX). We test the information content and market efficiency of IVIX in the prediction of future realized volatility.…”

Is Indian Equity Options Market Suitable for Hedging When the Options Payoff Structure Changes?

“…Dixit, Yadav, and Jain (2010) found that implied volatilities failed to capture all the information available in the historical returns intimating that the mispricing of options, and the options market can become efficient only when these erroneous pricings are corrected. Shaikh and Padhi (2013;2015) found that the ex-ante volatility was more informative and impounded necessary information to explain the future realized return volatility while examining the causal relationship between the pairs of ex-ante and ex-post volatility of S&P CNX Nifty index options.…”