Premium
Is implied volatility more informative for forecasting realized volatility: An international perspective
Author(s) -
Liang Chao,
Wei Yu,
Zhang Yaojie
Publication year - 2020
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2686
Subject(s) - volatility (finance) , implied volatility , economics , econometrics , realized variance , volatility swap , autoregressive model , volatility smile , financial economics , forward volatility , stock market volatility , stock market , volatility risk premium , paleontology , horse , biology
Abstract Inspired by the commonly held view that international stock market volatility is equivalent to cross‐market information flow, we propose various ways of constructing two types of information flow, based on realized volatility (RV) and implied volatility (IV), in multiple international markets. We focus on the RVs derived from the intraday prices of eight international stock markets and use a heterogeneous autoregressive framework to forecast the future volatility of each market for 1 day to 22 days ahead. Our Diebold‐Mariano tests provide strong evidence that information flow with IV enhances the accuracy of forecasting international RVs over all of the prediction horizons. The results of a model confidence set test show that a market's own IV and the first principal component of the international IVs exhibit the strongest predictive ability. In addition, the use of information flows with IV can further increase economic returns. Our results are supported by the findings of a wide range of robustness checks.