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The forecasting performance of implied volatility index: evidence from India VIX

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  • Imlak Shaikh
  • Puja Padhi

Abstract

In this paper, we investigate the forecasting performance of ex-post an ex-ante volatility forecasts against realized return volatility of various time horizon. The competing volatility forecasts are implied volatility, RiskMetrics and GJR-GARCH; the empirical results uncover that implied volatility dominates the other volatility forecast in the prediction of future realized return volatility. The in-sample forecast suggests that ex-ante volatility best explains the future market volatility. The non-overlapping sampling procedure gives the more robust estimate of volatility forecasts, the results reveals that implied volatility forecasts of all horizon appears positive unbiased forecaster of realized volatility. Moreover, the instrumental variable estimation in the presence of error-in-variable clears that implied volatility is free from measurement error; OLS estimates remains more consistent than the 2SLS estimates. The information content of implied volatility encourages the exchanges to construct the implied volatility indices and volatility products on underlying volatility index. Copyright Springer Science+Business Media New York 2014

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  • Imlak Shaikh & Puja Padhi, 2014. "The forecasting performance of implied volatility index: evidence from India VIX," Economic Change and Restructuring, Springer, vol. 47(4), pages 251-274, November.
    • Handle: RePEc:kap:ecopln:v:47:y:2014:i:4:p:251-274
    DOI: 10.1007/s10644-014-9149-z
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    Cited by:

    1. Linyu Wang & Yifan Ji & Zhongxin Ni, 2024. "Which implied volatilities contain more information? Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1896-1919, April.
    2. Peng, Qing & Li, Jie & Zhao, Yu & Wu, Han, 2021. "The informational content of implied volatility: Application to the USD/JPY exchange rates," Journal of Asian Economics, Elsevier, vol. 76(C).
    3. Dicle, Mehmet F. & Levendis, John, 2020. "Historic risk and implied volatility," Global Finance Journal, Elsevier, vol. 45(C).
    4. Shaikh, Imlak, 2017. "The 2016 U.S. presidential election and the Stock, FX and VIX markets," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 546-563.
    5. Puja Padhi & Imlak Shaikh, 2014. "On the relationship of implied, realized and historical volatility: evidence from NSE equity index options," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(5), pages 915-934, November.
    6. Saffet Akdag & Ömer İskenderoglu & Andrew Adewale Alola, 2020. "The volatility spillover effects among risk appetite indexes: insight from the VIX and the rise," Letters in Spatial and Resource Sciences, Springer, vol. 13(1), pages 49-65, April.

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    More about this item

    Keywords

    Information content; Ex-ante and ex-post volatility; IVIX; India VIX; RiskMetrics; Measurement error; 2SLS; C53; G14;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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