Journal Press India®

Implied Volatility V/s Realized Volatility: A Forecasting Dimension for Indian Markets

Vol 17 , Issue 2 , July - December 2016 | Pages: 75-85 | Research Paper  

https://doi.org/10.51768/dbr.v17i2.172201606


Author Details ( * ) denotes Corresponding author

1. * Karam Pal Narwal, Professor, Haryana School of Business, Guru Jambheshwar University of Science & Technology, Haryana, India (karampalsingh@yahoo.com)
2. Ved Pal Sheera, Professor, Haryana School of Business, Guru Jambheshwar University of Science & Technology, Haryana, India
3. Ruhee Mittal, Assistant Professor, Rukmini Devi Institute of Advanced Studies, New Delhi, Delhi, India

Purpose: The aim of the present study is to examine the forecasting efficiency of implied volatility index of India in predicting the future stock market volatility. Therefore, the forecasting efficacy of implied volatility index is compared with intra high-low price range volatility in providing volatility forecasts for S&P CNX Nifty 50 index.
Design/Methodology/Approach: The generalized autoregressive conditional heteroskedasticity model (GJR-GARCH) is used for the Indian markets as this model captures the asymmetric effect of good news and bad news on conditional volatility. The GJR-GARCH model is augmented with implied volatility and high-low price range volatility.This model is used to compare the forecasting efficiency of implied volatility index with the realised volatility represented by high-low range price volatility, to find out which is a better measure of forecasting the future stock market volatility. For measuring the forecasting performance of IVIX on various forecasting horizons (1-, 5, 10-, and 20-days), the test for in-sample and out-of-sample data is done.
Findings: The results of in-sample regression show that both implied and high-low volatility contains significant information about the conditional volatility. On the other hand, the overall ranking given to the different models on the basis of out-of-sample forecasting evaluations show that the GJR-GARCH model with IVIX consistently performs better than other models, over various forecast horizons. This shows that IVIX is able to provide incremental information about future volatility forecasts and is a better measure of predicting future volatility than the high-low range volatility. 
Research Limitations: The major limitation of the study is the data period. Further, more countries can be included in this research to compare the predictive abilities of volatility indices of international markets.
Practical Implications: The major implication of this study is for the investors who can use implied volatility indices for forecasting the future volatility, thus can be used as a market timing tool.
Originality/Value: In this study a novel approach is developed for examining the predictive ability of Indian implied volatility index. To the best of authors knowledge no research of this kind has been conducted using Indian stock markets has been carried out.

Keywords

Indian VIX, S&P CNX Nifty, GJR-GARCH Model, Indian Stock Markets.

  1. Andersen, T.G., Bollerslev, T., Diebold, F.X., & Ebens, H. (2001). The distribution of stock return volatility. The Journal of Financial Economics, 61(1), 43-76.
  2. Blair, B.J., Poon, S.H., & Taylor, S.J. (2001). Forecasting S&P 100 volatility: The incremental information content of implied volatilities and high frequency index returns. Journal of Econometrics, 105(1), 5-26.
  3. Bollerslev, T., & Wooldridge, J.M. (1992). Quasi-maximum likelihood estimation and inference in dynamic models with time-varying co-variances. Econometric Reviews, 11(2), 143-172.
  4. Bollerslev, T., Chou, R.Y., & Kroner, K.F. (1992). ARCH modeling in finance: A review of the theory and empirical evidence. The Journal of Econometrics, 52(1-2), 5-59.
  5. Canina, L., & Figlewski, S. (1993). The informational content of implied volatility. Review of Financial Studies, 6(3), 659-681.
  6. Chiras, D.P., & Manaster, S. (1978). The information content of option prices and a test for market efficiency. Journal of Financial Economics, 6(2-3), 213-234.
  7. Christensen, B.J., & Prabhala, N.R. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125-150.
  8. Corrado, C., & Truong, C. (2007). Forecasting stock index volatility: Comparing implied volatility and the intraday high low price range. The Journal of Financial Research, 30(2), 201-215.
  9. Day, T.E., & Lewis, C.M. (1992). Stock market volatility and the informational content of stock index options. Journal of Econometrics, 52(1-2), 267-287.
  10. Fleming, J. (1998). The quality of market volatility forecasts implied by S&P 100 index option prices. Journal of Empirical Finance, 5(4), 317-345.
  11. Fleming, J., Ostdiek, B., & Whaley, R E. (1995). Predicting stock market volatility: A new measure. Journal of Futures Markets, 15(3), 265-302.
  12. Glosten, L.R., Jagannathan, R., & Runkle, D.E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. Journal of Finance, 48(5), 1779-1801.
  13. Hansen, P., & Lunde, A. (2006). Realized variance and market microstructure noise. Journal of Business & Economic Statistics, 24(2), 127-161.
  14. Hung, C.H., Tzang, S.W., & Hsyu, D.S.D. (2009). Forecasting efficiency of implied volatility and the intraday high-low price range in Taiwan stock market. International Research Journal of Finance and Economics, 27, 192-202.
  15. Jorion, P. (1995). Predicting volatility in the foreign exchange market. Journal of Finance, 50(2), 507-528.
  16. Lamoureux, C.G., & Lastrapes, W.D. (1993). Forecasting stock return variance: Towards an understanding of stochastic implied volatilities. Review of Financial Studies, 6(2), 293-326.
  17. Latane, H.A., & Rendleman, R.J. (1976). Standard deviations of stock price ratios implied in option prices. Journal of Finance, 31(2), 369-381.
  18. Parkinson, M. (1980). The extreme value method for estimating the variance of the rate of return. Journal of Business, 53(1), 61-65.
  19. Patton, A.J. (2006). Modelling Asymmetric Exchange Rate Dependence. International Economic Review, 47(2), 527-556.
  20. Taylor, S. (1986). Modelling financial time series. (1st ed.). New York: Wiley.
Abstract Views: 3
PDF Views: 453

Advanced Search

News/Events

Institute of Managem...

Deccan Education Society Institute of Management Development and Re...

S.B. Patil Institute...

Pimpri Chinchwad Education Trust's S.B. Patil Institute of Mana...

D. Y. Patil IMCAM, A...

D. Y. Patil Institute of Master of Computer Applications & Managem...

Vignana Jyothi Insti...

Vignana Jyothi Institute of Management International Conference on ...

Department of Commer...

Department of Commerce, Faculty of Commerce & Business, University...

Birla Institute of M...

Birla Institute of Management Technology (BIMTECH) 3rd Pritam Singh M...

OP Jindal University...

OP Jindal University, India 4th International Conference on  ...

Department of MBA, N...

Department of MBA, Narayana Engineering College Nellore International...

Vignana Jyothi Insti...

Vignana Jyothi Institute of Management Conference Proceedings,...

Online Proceedings R...

Conference Proceedings, March 2023 ISBN: 978-81-956810-6-8 ...

By continuing to use this website, you consent to the use of cookies in accordance with our Cookie Policy.