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The information content of option implied volatility surrounding the 1997 Hong Kong stock market crash

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  • Joseph K. W. Fung

Abstract

This study examines the information conveyed by options and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The author determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other leading indicator candidates. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, nonoverlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The study also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility. These results indicate that the options market is highly efficient informationally. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:555–574, 2007

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  • Joseph K. W. Fung, 2007. "The information content of option implied volatility surrounding the 1997 Hong Kong stock market crash," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(6), pages 555-574, June.
    • Handle: RePEc:wly:jfutmk:v:27:y:2007:i:6:p:555-574
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    Cited by:

    1. Tarik Driouchi & Lenos Trigeorgis & Raymond H. Y. So, 2018. "Option implied ambiguity and its information content: Evidence from the subprime crisis," Annals of Operations Research, Springer, vol. 262(2), pages 463-491, March.

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