Intraday volatility forecasting from implied volatility

Abstract

Purpose

The purpose of this paper is to examine whether the superiority of the implied volatility from a stochastic volatility model over the implied volatility from the Black and Scholes model on the forecasting performance of future realized volatility still holds when intraday data are analyzed.

Design/methodology/approach

Two implied volatilities and a realized volatility on KOSPI200 index options are estimated every hour. The grander causality tests between an implied volatility and a realized volatility is carried out for checking the forecasting performance. A dummy variable is added to the grander causality test to examine the change of the forecasting performance when a specific environment is chosen. A trading simulation is conducted to check the economic value of the forecasting performance.

Findings

Contrary to the previous studies, the implied volatility from a stochastic volatility model is not superior to that from the Black and Scholes model for the intraday volatility forecasting even if both implied volatilities are informative on one hour ahead future volatility. The forecasting performances of both implied volatilities are improved under high volatile market or low return market.

Practical implications

The trading strategy using the forecasting power of an implied volatility earns positively, in particular, more positively under high volatile market or low return market. However, it looks risky to follow the trading strategy because the performance is too volatile. Between two implied volatilities, it is hardly to say that one implied volatility beats another in terms of the economic value.

Originality/value

This is the first study which shows the forecasting performances of implied volatilities on the intraday future volatility.

Citation

Joon Byun, S., Woo Rhee, D. and Kim, S. (2011), "Intraday volatility forecasting from implied volatility", International Journal of Managerial Finance, Vol. 7 No. 1, pp. 83-100. https://doi.org/10.1108/17439131111109017