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Study on Model-Free Implied Volatility of Hang Seng Index options

Author

Listed:
  • David Liu
  • Ran Lin
  • Lei Zhang

Abstract

This paper carries out studies on the Model-Free Implied Volatility (MF-IV) and other two competing volatility measurements including Black-Scholes Implied Volatility (BS-IV) and GARCH (1,1) with respect to forecasting error and information content. It is known that MF-IV is a volatility measurement independent of any option pricing model and it provides a direct test on market efficiency. The study introduces data of Hang Seng Index Call Options over two different forecasting horizons to compare the forecasting performance. The empirical results indicate that MF-IV contains richer information content than BS-IV over both monthly and bi-monthly forecasting horizons. However, MF-IV has better predictive accuracy in monthly forecasting horizon, while BS-IV performs better over bi-monthly forecasting horizon.

Suggested Citation

  • David Liu & Ran Lin & Lei Zhang, 2012. "Study on Model-Free Implied Volatility of Hang Seng Index options," International Journal of Mathematics in Operational Research, Inderscience Enterprises Ltd, vol. 4(2), pages 197-210.
    • Handle: RePEc:ids:ijmore:v:4:y:2012:i:2:p:197-210
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