The Information Content Of Implied Volatility In Forecasting And Application

As an important indicator of market risk,implied volatility can provide timely and effective information in volatility prediction.And volatility index,which is a more intuitive measure of implied volatility,reflects the expectation of the market volatility for the next 30 days.Since the subprime crisis,the importance of volatility index has been recognized widely.Various countries has launched volatility index and related derivatives based on respective markets.On June 26th,2015,the Shanghai Stock Exchange issued the first Chinese volatility index(iVIX).Calculated from the transaction data of SSE50 ETF's option,this index reflects the sentiment of the Chinese investors.Although iVIX has been launched for more than two years,there has been no research in exploring the prediction information and economic value of i VIX.Based on this background,we applied the realized volatility model in testing whether the implied volatility(iVIX)contains information for predicting the volatility of SSE50 companies.For both weekly and monthly forecasts,the empirical research indicates that implied volatility contains predictive power beyond what is embedded in realized volatility and the momentum variable.Meanwhile,we find that the prediction of models in the medium term is superior to that in the long term,which shows that the prediction ability of market information decays with time.However,implied volatility releases more information in the monthly forecast,and even reverses the attenuation for some companies.Finally,in order to explore the economic value of implied volatility,we employ the volatility timing strategy based on the above predictions.With the equally weighted portfolio being the benchmark,our strategy can significantly reduce the variance of return both for monthly and weekly rebalancing.Besides,implied volatility outperforms in sharp ratio and has lower transaction cost than volatility timing strategy based on historical results.