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Revisiting the long memory dynamics of the implied-realized volatility relationship: New evidence from the wavelet regression
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SYSNO ASEP 0456186 Document Type J - Journal Article R&D Document Type Journal Article Subsidiary J Článek ve WOS Title Revisiting the long memory dynamics of the implied-realized volatility relationship: New evidence from the wavelet regression Author(s) Baruník, Jozef (UTIA-B) RID, ORCID
Hlínková, M. (CZ)Number of authors 2 Source Title Economic Modelling. - : Elsevier - ISSN 0264-9993
Roč. 54, č. 1 (2016), s. 503-514Number of pages 33 s. Publication form Print - P Language eng - English Country NL - Netherlands Keywords wavelet band spectrum regression ; corridor implied volatility ; realized volatility ; fractional cointegration Subject RIV AH - Economics R&D Projects GBP402/12/G097 GA ČR - Czech Science Foundation (CSF) Institutional support UTIA-B - RVO:67985556 UT WOS 000374195900041 EID SCOPUS 84958756722 DOI 10.1016/j.econmod.2016.01.014 Annotation 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. Workplace Institute of Information Theory and Automation Contact Markéta Votavová, votavova@utia.cas.cz, Tel.: 266 052 201. Year of Publishing 2017
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