Stock market volatility and the information content of stock index options

Previous studies of the information content of the implied volatilities from the prices of call options have used a cross-sectional regression approach. This paper compares the information content of the implied volatilities from call options on the S&P 100 index to GARCH (Generalized Autoregressive Conditional Heteroscedasticity) and Exponential GARCH models of conditional volatility. By adding the implied volatility to GARCH and EGARCH models as an exogenous variable, the within-sample incremental information content of implied volatilities can be examined using a likelihood ratio test of several nested models for conditional volatility. The out-of-sample predictive content of these models is also examined by regressing expost volatility on the implied volatilities and the forecasts from GARCH and EGARCH models.