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Testing the Predictive Ability of Corridor Implied Volatility Under GARCH Models

Lu, S. (2019) Testing the Predictive Ability of Corridor Implied Volatility Under GARCH Models. Asia-Pacific Financial Markets, 26 (2). pp. 129-168. ISSN 1387-2834. (doi:10.1007/s10690-018-9262-5) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:89963)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1007/s10690-018-9262-5

Abstract

This paper studies the predictive ability of corridor implied volatility (CIV) measure. It is motivated by the fact that CIV is measured with better precision and reliability than the model-free implied volatility due to the lack of liquid options in the tails of the risk-neutral distribution. By adding CIV measures to the modified GARCH specifications, the out-of-sample predictive ability of CIV is measured by the forecast accuracy of conditional volatility. It finds that the narrowest CIV measure, covering about 10 of the RND, dominate the 1-day ahead conditional volatility forecasts regardless of the choice of GARCH models in high volatile period; as market moves to non volatile periods, the optimal width broadens. For multi-day ahead forecasts narrow and mid-range CIV measures are favoured in the full sample and high volatile period for all forecast horizons, depending on which loss functions are used; whereas in non turbulent markets, certain mid-range CIV measures are favoured, for rare instances, wide CIV measures dominate the performance. Regarding the comparisons between best performed CIV measures and two benchmark measures (market volatility index and at-the-money Black–Scholes implied volatility), it shows that under the EGARCH framework, none of the benchmark measures are found to outperform best performed CIV measures, whereas under the GARCH and NAGARCH models, best performed CIV measures are outperformed by benchmark measures for certain instances. © 2018, Springer Japan KK, part of Springer Nature.

Item Type: Article
DOI/Identification number: 10.1007/s10690-018-9262-5
Uncontrolled keywords: Corridor implied volatility, GARCH models, Model-free implied volatility, Black–Scholes implied volatility
Subjects: H Social Sciences
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Shan Lu
Date Deposited: 31 Aug 2021 10:54 UTC
Last Modified: 03 Sep 2021 12:42 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/89963 (The current URI for this page, for reference purposes)
Lu, S.: https://orcid.org/0000-0002-7588-8599
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