Revisiting the long memory dynamics of the implied-realized volatility relationship: New evidence from the wavelet regression

0456186 - ÚTIA 2017 RIV NL eng J - Journal Article
Baruník, Jozef - Hlínková, M.
Revisiting the long memory dynamics of the implied-realized volatility relationship: New evidence from the wavelet regression.
Economic Modelling. Roč. 54, č. 1 (2016), s. 503-514. ISSN 0264-9993. E-ISSN 1873-6122
R&D Projects: GA ČR(CZ) GBP402/12/G097
Institutional support: RVO:67985556
Keywords : wavelet band spectrum regression * corridor implied volatility * realized volatility * fractional cointegration
Subject RIV: AH - Economics
Impact factor: 1.463, year: 2016
http://library.utia.cas.cz/separaty/2016/E/barunik-0456186.pdf

The literature studying stock index options confirms severe biases and inefficiencies in using implied volatility as a forecast of future volatility. In this paper, we revisit the implied-realized volatility relationship with wavelet band least squares (WBLS) exploring the long memory of volatility, a possible cause of the bias. Using the S/&P 500 and DAX monthly and bi-weekly option prices covering the recent financial crisis, we conclude that the implied-realized volatility relation is driven solely by the lower frequencies of the spectra representing long investment horizons. The findings enable improvement of future volatility forecasts as they support unbiasedness of implied volatility as a good proxy for future volatility in the long run.
Permanent Link: http://hdl.handle.net/11104/0260443