Implied Volatility in Options Markets and Conditional Heteroscedasticity in Stock Markets |
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| Authors: | Seungmook Choi Mark E. Wohar |
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| Affiliation: | University of Nevada, Las Vegas, NV 89154.;University of Nebraska, Omaha, NE 68182. The authors would like to thank Richard Baillie, Larry Cordell, Doug Gordon, David Simon, Steve Swidler, and two anonymous referees for helpful comments and suggestions. |
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| Abstract: | This study examines whether or not the volatility of stock index returns forecasted by a GARCH-M specification is consistent with the implied volatility observed in options markets. Recent data for the New York Stock Exchange Composite Index and Standard & Poor's 500 Index and their options are employed. The patterns of the term structure of implied volatility are compared with those of volatility estimates obtained from the GARCH process. The results indicate that the GARCH process appears to partially explain the variation of implied volatilities and the term structure of implied volatilities. |
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