Dynamic interaction between historical and implied volatility in the Indian option market Online publication date: Wed, 22-Sep-2021
by T. Viswanathan; R. Sriram; Prathana Mukherjee
International Journal of Public Sector Performance Management (IJPSPM), Vol. 8, No. 1/2, 2021
Abstract: Forecasting volatility plays a key role while trading in the futures and options market. An accurate estimate of future volatility would facilitate the traders to determine the intrinsic value of options. In the spot market, volatility is estimated based on the variance of historical returns. However, the volatility of stocks and market indices in the options market is estimated based on implied volatility. This paper investigates the dynamic interaction of historical volatility and the market estimate of future volatility, which is termed as implied volatility (IV). We examine the performance of the Nifty index options' implied volatility and determine its power to predict future market volatility. The study is based on the implied volatility of Nifty call and put index options for the period between 2010 and 2018. We apply the co-integration test to examine the causal relationship between the historical and implied volatility. We apply ARIMA and GARCH models to examine the forecasting ability of implied volatility. The results of the study indicate that implied volatility has the power to predict future volatility of market returns.
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Public Sector Performance Management (IJPSPM):
Login with your Inderscience username and password:
Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.
If you still need assistance, please email subs@inderscience.com