On the relationship of implied, realized and historical volatility: evidence from NSE equity index options Cover Image

On the relationship of implied, realized and historical volatility: evidence from NSE equity index options
On the relationship of implied, realized and historical volatility: evidence from NSE equity index options

Author(s): Puja Padhi, Imlak Shaikh
Subject(s): Financial Markets
Published by: Vilnius Gediminas Technical University
Keywords: call implied volatility; put implied volatility; realized volatility; historical volatility; measurement errors; two stage least squares; instrumental variable; G13; G14; C53;

Summary/Abstract: This study examines the information content of implied volatility, using the options of the underlying S&P CNX Nifty index. In this study, implied, historical and realized volatilities are calculated using non-overlapping monthly at-the-money samples. The study covers the period from introduction of options on the derivative segment of NSE, June 2001 to May 2011. The results reveal that call and put implied volatility of S&P CNX Nifty index option does contain information about future realized return volatility. This study accounts for the problem of error-in-variable and controls for it by using the instrumental variable technique. In the 2SLS estimation, the Hausman H-statistic shows that call implied volatility is measured with error. Hence, 2SLS coefficients are more consistent than the OLS estimates. Results of this study might prove to be helpful to the volatility traders in volatility forecasting and option pricing.

  • Issue Year: 15/2014
  • Issue No: 5
  • Page Range: 915-934
  • Page Count: 20
  • Language: English