On the relationship of implied, realized and historical volatility: evidence from NSE equity index options

This study examines the information content of implied volatility, using the options of the underlying SP CNX Nifty index. In this study, implied, historical and realized volatilities are calculated using non-overlapping monthly at-the-money samples. The study covers the period from introduction of...

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Bibliographic Details
Published in:Journal of business economics and management 2014-01, Vol.15 (5), p.915-934
Main Authors: Padhi, Puja, Shaikh, Imlak
Format: Article
Language:English
Subjects:
call implied volatility
Financial Markets
historical volatility
instrumental variable
measurement errors
put implied volatility
realized volatility
two stage least squares
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Summary:This study examines the information content of implied volatility, using the options of the underlying SP CNX Nifty index. In this study, implied, historical and realized volatilities are calculated using non-overlapping monthly at-the-money samples. The study covers the period from introduction of options on the derivative segment of NSE, June 2001 to May 2011. The results reveal that call and put implied volatility of SP CNX Nifty index option does contain information about future realized return volatility. This study accounts for the problem of error-in-variable and controls for it by using the instrumental variable technique. In the 2SLS estimation, the Hausman H-statistic shows that call implied volatility is measured with error. Hence, 2SLS coefficients are more consistent than the OLS estimates. Results of this study might prove to be helpful to the volatility traders in volatility forecasting and option pricing.
ISSN:1611-1699
2029-4433
DOI:10.3846/16111699.2013.793605