Using implied volatility on options to measure the relation between asset returns and variability |
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| Affiliation: | 1. Finance Department, Southern Illinois University, Carbondale, IL 62901, USA;2. Hyup Sung Industrial Co., Ltd., 447-5 Chobu-Ri, MoHyun-Myon, Yong In-Si, KyongGi-Do, South Korea;1. CeReFiM, University of Namur, Belgium;2. EconomiX, Université Paris Ouest, France;3. University of Essex, UK;4. University College Dublin, Ireland;5. Fordham University, United States;1. Department of Economics, Waikato University, New Zealand;2. Facultad de Economía, Universidad del Rosario, Colombia;3. Department of Economics, University of Macedonia, Greece;1. John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. West, Montreal, Quebec H3G 1M8, Canada;2. Chinese Academy of Finance and Development, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing 100081, PR China |
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| Abstract: | Prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days, and that there is an inverse asymmetric relation between volatility and returns in both stocks and long-term bonds. We examine these relations in 37 futures options markets representing a wide variety of asset types. Using futures prices and implied volatilities from this extensive array of markets, we confirm that in all of them, save one, market volatility is more directly related to trading days. However, the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges. Thus, we show that findings from equity markets apparently are not generalizable to other asset classes. |
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