JAMP  Vol.3 No.1 , January 2015
Volatility Forecasting and Volatility Risk Premium
Abstract: Volatility is an important variable in the financial market. We propose a model-free implied volatility method to measure the volatility and test the volatility risk premium. The model-free implied volatility does not depend on the option pricing model, and extracts information from all the option contracts. We provide empirical evidence from the S & P 500 index option that model-free implied volatility is more accurate to forecast the future volatility and the volatility risk premium does not exist.
Cite this paper: Cheng, J. (2015) Volatility Forecasting and Volatility Risk Premium. Journal of Applied Mathematics and Physics, 3, 98-102. doi: 10.4236/jamp.2015.31014.

[1]   Engle, R.F. (1982) Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation. Econometrica, 50, 987-1007.

[2]   Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307- 327.

[3]   Taylor, S.J. (1986) Modeling Financial Time Series. John Wiley & Sons, New York.

[4]   DuPire, B. (1994) Pricing with a Smile. Risk, 7, 18-20.

[5]   Neuberger, A. (1994) The Log Contract. Journal of Portfolio Management, 20, 74-80.

[6]   Demeterfi, K. (1999) A Guide to Volatility and Variance Swap. Journal of Derivatives, 6, 9-32.

[7]   Demeterfi, K. (1999) More than You Ever Wanted to Know about Volatility Swaps. Goldman Sachs Quantitative Strategies Research Note.

[8]   Britten-Jones, M. and Neuberger, A. (2000) Option Prices, Implied Price Processes, and Stochastic Volatility. Journal of Finance, 55, 839-866.

[9]   Jiang, G.J. and Tian, Y.S. (2005) The Model-Free Implied Volatility and Its Information Content. The Review of Financial Studies, 18, 1305-1342.

[10]   Jiang, G.J. and Tian, Y.S. (2007) Extracting Model-Free Volatility from Option Prices: An Examination of the VIX Index. Journal of Derivatives, 14.

[11]   Tsay, R.S. (2005) Analysis of Financial Time Series. John Wiley & Sons.