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The Model-Free Implied Volatility and Its Information Content

George J. Jiang1,2; Yisong S. Tian3

1 University of Arizona · 2 Washington State University · 3 York University

Review of Financial Studies 2005

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor’s 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black–Scholes (B–S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.

DOI
10.1093/rfs/hhi027
Volume
18 (4)
Pages
1305-1342
Language
en
Export
BibTeX
Sources
crossref openalex