Forcasting Volatility With Implied Volatility

For investors, the ability to predict volatility is a very important task, which allow investors to anticipate the risks they will face and take appropriate hegding strategy. Currently, the model for forecasting volatility can be broadly classified into two classes:First, look-back type model, mainly based on historical information, such as GARCH-type models; Second is forward-looking type model, refers to compute the volatility implied by the option price and pricing model.There are so many empirical researches focused on the issue that which kind of model performs better than another.Most people agree on the view that the implied volatility indeed contain some information about the future volatility,but whether it contains all the information from GARCH model’s volatility is not conclusive. In this paper,we assume that implied volatility content some information about future volatility, then using the Hong Kong Hang Seng Index options data to construct two implied volatility index.Then we bring the index as a factor into the GARCH model, constituteing the GJR-GARCH-X model for forcasting volatility so as to improving the forecasting accuracy. At last,this paper will compare the GJR-GARCH-X model with standard GJR-GARCH and Riskmetrics model to prove the our hypothesis. Empirical results show that, in forecasting future volatility, GJR-GARCH-X is a better model.There are two main innovations in this paper:First, using the empirical data which have great relevance to the Mainland market from Hong Kong Hang Seng Index market,including Hang Seng Index, Hang Seng Index futures and Hang Seng Index options.To China’s financial markets,especially the fledging market of stock index futures and warrants,it has some referance value.Second is the structure of implied volatility index.This paper attempts to construct the option implied volatility index of HSI and analyze as a impact factor,whether this index can improve the accuracy of GARCH model.This application about HSI’s implied volatility index has not yet appeared in the literature.After the collapse of Lehman Brothers in 2008, the global market collapsed,Iceland bankrupt overnight, moreover Greece, Italy and Spain has the outbreak of financial turmoil. However Chinese economy has maintained a good development, the stock market has also been concern. The issue of Baosteel in August 22,2005 and listing of stock index future in April 16,2010, marking the Chinese stock market ushered in a higher stage of development after ten years of exporation.Warrant is a kind of option,although the warrant market in China is still imperfect, it can accumulate valuable experience for the future development of financial derivatives.The research about option volatility in this paper may has some significance to promote the future development of our country’s derivatives market.