The information content of risk-neutral skewness for volatility forecasting |
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| Institution: | 1. Department of Banking and Finance, Faculty of Business and Economics, 900 Dandenong Road, Caulfield East 3145, Australia;2. School of Commerce, Division of Business, University of South Australia, City West Campus, GPO Box 2471, Adelaide, South Australia 5001, Australia;1. Department of Economics and Finance, Utah State University, 3565 Old Main Hill, Logan, UT 84322, United States;2. Department of Finance, Marquette University, David A. Straz, Jr. Hall, Milwaukee, WI 53201, United States;1. Columbia Business School and NBER, United States;2. European Central Bank, Germany |
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| Abstract: | The paper investigates whether risk-neutral skewness has incremental explanatory power for future volatility in the S&P 500 index. While most of previous studies have investigated the usefulness of historical volatility and implied volatility for volatility forecasting, we study the information content of risk-neutral skewness in volatility forecasting model. In particular, we concentrate on Heterogeneous Autoregressive model of Realized Volatility and Implied Volatility (HAR-RV-IV). We find that risk-neutral skewness contains additional information for future volatility, relative to past realized volatilities and implied volatility. Out-of-sample analyses confirm that risk-neutral skewness improves significantly the accuracy of volatility forecasts for future volatility. |
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