Implied Volatility by Variance Decomposition Method
Article Details
Pub. Date
:
April, 2008
Product Name
:
The IUP Journal of Derivative Markets
Product Type
:
Article
Product Code
:
IJDM20804
Author Name
:
Joocheol Kim, WooWhan Kim and KiHyung Kim
Availability
:
YES
Subject/Domain
:
Finance Management
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:
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Description
This paper provides the variance decomposition method to calculate the market volatility index implied in option price and compares the prediction quality of realized volatility with VIX, which is a well-known volatility index. The method is based on the variance calculation conditioned on strike price.
Using the c, the authors 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 has similar dynamics of VIX and shows good prediction power of realized volatility.
