Forecasting SMI Volatility

Download or read book Forecasting SMI Volatility written by Andreas Bloechlinger and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this paper, we examine the information content and predictive power of implied standard deviations derived from EUREX options on the Swiss market index (SMI). Implied volatilities are computed from the Black and Scholes (1973) model as well as the Duan (1995) GARCH option pricing model, a more flexible method to price options. The statistical analysis shows that a combination of implied volatilities from the GARCH option pricing model and daily returns delivers the best results. We find no incremental information in using the model of Black and Scholes or intraday returns. In the medium term, two to three weeks, the implied volatility according to Duan is the single most informative source.