| By: |
Kim, Joocheol;
Kim, WooWhan;
Kim, KiHyung |
| Abstract: |
This paper provides a new method-what is called variance decomposition method-
to calculate market volatility index implied in option price and compares the
prediction quality of realized volatility with VIX that is well known as
volatility index. The volatility using variance decomposition has an
advantage, since it reflects market participants’ expectation. Our method is
based on the variance calculation decomposed into two components which are
conditioned on other variable, strike price in this paper. We use
high-frequency data (daily based) to calculate variance decomposition
volatility as well as VIX and compare the prediction quality of these indexes
for realized volatility. The empirical result shows that variance
decomposition volatility index is similar to the dynamics of VIX and shows
good prediction power of realized volatility. We also discuss our findings in
long range dependence of realized volatility with respect to variance
decomposition and VIX. |
| Keywords: |
Realized Volatility; Implied Volatility; Variance decomposition; VIX |
| JEL: |
G13 G12 G32 |
| Date: |
2006–11 |
| URL: |
http://d.repec.org/n?u=RePEc:pra:mprapa:936&r=mst |