The Information Content of Model‐Free Implied Volatility

This study examines the information content of model‐free implied volatility ( MFIV ) estimates with respect to the options and futures markets in H ong K ong. In this study, the volatility forecasting performance of MFIV is compared, using different prediction horizons, to IV estimates based on B lack's futures option pricing model ( BIV ) and time‐series forecasts based on historical volatility ( TS ‐ HV ). The results show that the BIV prediction is unbiased for different horizon forecasts. MFIV outperforms TS ‐ HV forecasts and, most importantly, BIV subsumes the information content of both MFIV and TS ‐ HV forecasts. The results are largely maintained for next‐day forecasts but the forecasting quality of the two IV measures declines as expiration day approaches. The information contents of MFIV and TS ‐ HV forecasts are complementary. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:792‐806, 2012