State‐preference pricing and volatility indices |
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| Authors: | Zhangxin Liu Michael J. O'Neill |
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| Affiliation: | 1. Business School, The University of Western Australia, Perth, WA, Australia;2. Faculty of Business, Bond University, Gold Coast, QLD, Australia |
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| Abstract: | This study uses a state‐preference pricing approach to develop a state‐price volatility index (SVX), as a forecast for market future realised volatility. We show that SVX is a more efficient forecaster than CBOE VIX for 30‐day realised volatility of SPX returns, using both in‐the‐sample and out‐of‐the‐sample tests. This result is robust to different measures of realised market volatilities. We also show that SVX provides a better volatility forecast than other alternative measures, including the at‐the‐money implied volatilities and GARCH (1, 1) volatility. Our results provide a foundation for forecasting higher risk‐neutral moments using the same state prices. |
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| Keywords: | State‐preference pricing
VIX
Volatility forecasting |
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