Information Content of Option Implied Volatility : Evidence from the Indian Market

Abstract

This paper attempts to investigate the information content of the implied volatility estimators and the historical volatility in forecasting future realized volatility. Implied volatility is computed from the Black-Scholes model and in a regression framework the relationship between different implied volatility estimators and the historical volatility estimator is examined . The results show that implied volatility estimators have information about the future volatility and implied volatility estimators dominate the historical volatility estimator. It is also found that the implied volatility extracted from call options fare better than that computed from put options . Further tests show that implied volatility estimators are unbiased and efficient estimators of the ex post realized volatility . The results also indicate that implied volatility is a rational forecast of future realized volatility.