The forecast quality of CBOE implied volatility indexes

Abstract

We examine the forecast quality of Chicago Board Options Exchange (CBOE) implied volatility indexes based on the Nasdaq 100 and Standard and Poor's 100 and 500 stock indexes. We find that the forecast quality of CBOE implied volatilities for the S&P 100 (VXO) and S&P 500 (VIX) has improved since 1995. Implied volatilities for the Nasdaq 100 (VXN) appear to provide even higher quality forecasts of future volatility. We further find that attenuation biases induced by the econometric problem of errors in variables appear to have largely disappeared from CBOE volatility index data since 1995.

Dynamics of the Relationship between Implied Volatility Indices and Stock Prices Indices: The Case of European Stock Markets

“…For their part, Corrado and Miller (2005) examined three US implied volatility indices namely VXN, VIX and VXO between January 1988 and December 2003. They found that the three implied volatility indices are efficient estimators of the stock market future volatility considering a GARCH modelling.…”

The information content of implied volatility index (India VIX)

“…Some of the earlier studies (Chiras and Manaster 1978;Christensen and Prabhala 1998;Christensen and Hansen 2002;Corrado and Miller 2005;Muzzioli 2007;Li and Yang 2009;Padhi and Shaikh 2013) conclude that implied volatility subsume all the information that contained in the historical volatility. The second strand of the literature on implied volatility index also supports the previous studies.…”

On the Intraday Relation Between the VIX and its Futures

“…The VIX has proven to be very useful in forecasting the future market direction, especially during high volatile periods. Forecasting qualities of the VIX outperform traditional volatility measures based on historical realized volatility and GARCH models (Corrado andMiller, 2005 andCarr andWu, 2006). However, while the VIX could be used for hedging purposes, it could not easily be traded.…”