We implement an estimator of the model-free implied volatility derived by Britten-Jones and Neuberger (2000) and investigate its information content in the S&P 500 index options. In contrast to the commonly used Black-Scholes implied volatility, the model-free implied volatility is not based on any specific option pricing model and thus provides a direct test of the informational efficiency of ...

This paper introduces a new class of stochastic volatility models which allows for stochastic volatility of volatility. Such models are given by volatility modulated non–Gaussian Ornstein Uhlenbeck processes. We study the probabilistic properties of such models both under the physical and under the risk neutral probability measure, where we focus in particular on the role of the volatility of v...

This study examines the performance of the S&P 100 implied volatility as a forecast of future stock market volatility. The results indicate that the implied volatility is an upward biased forecast, but also that it contains relevant information regarding future volatility. The implied volatility dominates the historical volatility rate in terms of ex ante forecasting power, and its forecast err...

In their 2014 article in the British Journal of Political Science, Eleanor Neff Powell and Joshua A. Tucker examine the determinants of party system volatility in post-communist Europe. Their central conclusion is that replacement volatility – volatility caused by new party entry and old party exit – is driven by long-term economic performance. This article shows that this conclusion is based e...

Volatility in equity markets is asymmetric: contemporaneous return and conditional return volatility are negatively correlated. In this article I develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy. The model allows both the leverage effect and the volatility feedback effect, the two popular explanations of asymmetry. T...

In this paper, we argue that study of the effect of financial development and shocks on aggregate growth volatility will not be informative because they affect growth volatility through its different components. Financial development affects only the business cycle component of volatility and therefore, the effect on total volatility is dependent on its share in total volatility. On the contrar...

This paper uses quantile regression to investigate the asymmetric return-volatility phenomenon with the newly adapted and robust implied volatility indices VIX, VXN, VDAX and VSTOXX. A particular goal is to quantify the effects of positive and negative stock index returns at various quantiles of the implied volatility distribution. As the level of the new volatility index increases during marke...

We compare the dynamic hedging performance of the deterministic local volatility function approach with the implied/constant volatility method. Using an example in which the underlying price follows an absolute diffusion process, we illustrate that hedge parameters computed from the implied/constant volatility method can have significant error even though the implied volatility method is able t...