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The relation between implied and realised volatility in the Danish option and equity markets
Author(s) -
Strunk Hansen Charlotte
Publication year - 2001
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/1467-629x.00059
Subject(s) - implied volatility , volatility (finance) , equity (law) , volatility smile , economics , econometrics , volatility swap , call option , realized variance , forward volatility , financial economics , danish , variance swap , index (typography) , computer science , linguistics , philosophy , world wide web , political science , law
We show that the conclusions to be drawn concerning the informational efficiency of illiquid options markets depend critically on whether one carefully recognises and appropriately deals with the econometrics of the errors‐in‐variables problem. This paper examines the information content of options on the Danish KFX share index. We consider the relation between the volatility implied in an option’s price and the subsequently realised index return volatility. Since these options are traded infrequently and in low volumes, the errors‐in‐variables problem is potentially large. We address the problem directly using instrumental variables techniques. We find that when measurement errors are controlled for, call option prices even in this very illiquid market contain information about future realised volatility over and above the information contained in historical volatility.