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The relationship between implied volatility and autocorrelation

The relationship between implied volatility and autocorrelation Purpose – This paper empirically assesses the determinants of conditional stock index autocorrelation with particular emphasis on the impact of return volatility that are theoretically linked through the behaviour of feedback traders. Design/methodology/approach – The S&P 100, 500 and the NASDAQ 100 index are considered and volatility in each series is captured using option‐implied estimates taken from the Chicago Board Options Exchange. A seemingly unrelated regression approach is used in which trading volume and volatility are simultaneously modelled. Findings – The results of this study suggest that low or even negative return autocorrelations are more likely in situations where: return volatility is high; price falls by a large amount; traded stock volumes are high; and the economy is in a recessionary phase. Research limitations/implications – The results confirm that previous related work showing a link between autocorrelation and volatility is not induced by a mechanical relation. Practical implications – Usage of endogenously determined volatility measures in this area of the literature is justified. Originality/value – This study provides a robustness test of the autocorrelation/volatility relation, as well as a further exploration of the utility inherent in option‐implied volatility. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

The relationship between implied volatility and autocorrelation

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References (13)

Publisher
Emerald Publishing
Copyright
Copyright © 2007 Emerald Group Publishing Limited. All rights reserved.
ISSN
1743-9132
DOI
10.1108/17439130710738736
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper empirically assesses the determinants of conditional stock index autocorrelation with particular emphasis on the impact of return volatility that are theoretically linked through the behaviour of feedback traders. Design/methodology/approach – The S&P 100, 500 and the NASDAQ 100 index are considered and volatility in each series is captured using option‐implied estimates taken from the Chicago Board Options Exchange. A seemingly unrelated regression approach is used in which trading volume and volatility are simultaneously modelled. Findings – The results of this study suggest that low or even negative return autocorrelations are more likely in situations where: return volatility is high; price falls by a large amount; traded stock volumes are high; and the economy is in a recessionary phase. Research limitations/implications – The results confirm that previous related work showing a link between autocorrelation and volatility is not induced by a mechanical relation. Practical implications – Usage of endogenously determined volatility measures in this area of the literature is justified. Originality/value – This study provides a robustness test of the autocorrelation/volatility relation, as well as a further exploration of the utility inherent in option‐implied volatility.

Journal

International Journal of Managerial Finance – Emerald Publishing

Published: Apr 10, 2007

Keywords: Volatility; Stock markets; United States of America

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