The Model-Free Implied Volatility and Its Information Content

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we...

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Bibliographic Details
Published in:The Review of financial studies 2005-01, Vol.18 (4), p.1305-1342
Main Authors: Jiang, George J., Tian, Yisong S.
Format: Article
Language:English
Subjects:
Approximation
Autocorrelation
Diffusion
Economic models
Economic theory
Efficiency
Finance
Forecasting models
Information
Information content
Market prices
Mathematical extrapolation
Methodology
Price volatility
Put & call options
Securities prices
Stock options
Stock prices
Strike prices
Studies
Truncation
Truncation errors
Volatility
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Summary:Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor's 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black-Scholes (B-S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhi027