Title: Study on Model-Free Implied Volatility of Hang Seng Index options

Authors: David Liu; Ran Lin; Lei Zhang

Addresses: Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, No. 111 Ren'ai Road, Suzhou Dushu Lake Higher Education Town, Suzhou Industrial Park, Jiangsu Province 215123, China. ' Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, No. 111 Ren'ai Road, Suzhou Dushu Lake Higher Education Town, Suzhou Industrial Park, Jiangsu Province 215123, China. ' Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, No. 111 Ren'ai Road, Suzhou Dushu Lake Higher Education Town, Suzhou Industrial Park, Jiangsu Province 215123, China

Abstract: This paper carries out studies on the Model-Free Implied Volatility (MF-IV) and other two competing volatility measurements including Black-Scholes Implied Volatility (BS-IV) and GARCH (1,1) with respect to forecasting error and information content. It is known that MF-IV is a volatility measurement independent of any option pricing model and it provides a direct test on market efficiency. The study introduces data of Hang Seng Index Call Options over two different forecasting horizons to compare the forecasting performance. The empirical results indicate that MF-IV contains richer information content than BS-IV over both monthly and bi-monthly forecasting horizons. However, MF-IV has better predictive accuracy in monthly forecasting horizon, while BS-IV performs better over bi-monthly forecasting horizon.

Keywords: model-free volatility; option pricing; volatility; options; Black-Scholes; BS model; Hang Seng Index; China; market efficiency; forecasting performance; stock markets.

DOI: 10.1504/IJMOR.2012.046377

International Journal of Mathematics in Operational Research, 2012 Vol.4 No.2, pp.197 - 210

Published online: 23 Dec 2014 *

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