| Author: | Lui, Chi-keung Evans |
| Title: | Empirical analysis on the relationship between implied volatility and realized volatility in Hong Kong and Japan |
| Degree: | D.B.A. |
| Year: | 2006 |
| Subject: | Hong Kong Polytechnic University -- Dissertations. Options (Finance) -- China -- Hong Kong. Options (Finance) -- Japan. Stock options -- China -- Hong Kong. Stock options -- Japan. |
| Department: | Graduate School of Business |
| Pages: | 161 leaves : ill. ; 30 cm. |
| Language: | English |
| Abstract: | Return and risk are the two most important topics in any financial theory. Volatility is one of the most important measures of risk in virtually every asset class, such as stocks, bonds, foreign currency and commodities. With the exponential growth of the option market, which is considered the market for volatility, volatility itself becomes another asset class. Therefore, forecasting volatility is becoming more and more important, not just in terms of its fundamental relationship with return, as precision in predicting volatility can itself bear important return implications. A wide body of literature in the field of volatility forecasting seems to paint a mixed picture on whether historical data or implied volatility from the option market do a better job in forecasting actual volatility. By employing both over-the-counter (OTC) and exchange-traded option data and various volatility forecast models derived from historical data, this study investigates the efficiency of both the Hong Kong and Japanese option markets. As well as considering the index option markets, the stock option markets of Hong Kong and Japan are also studied. Moreover, both the Hong Kong and Japanese index option markets are then compared with the US index option market in terms of their predictive power of future volatility. Finally, both overlapping sampling procedures and GARCH (1,1) models are employed as the robust tests to crosscheck the efficiency results for both the Hong Kong and Japanese index option markets. In general, both the Hong Kong and Japanese index option markets are found to be efficient in the sense that the option data carry more useful information than historical data in terms of forecasting the future volatility. However, implied volatility in both markets is found to be a biased estimator for future volatility. It is also found that OTC and exchange-traded implied volatilities in both Hong Kong and Japan are of similar predictive power. When it comes to stock options, this study only finds Hong Kong's stock option market to be efficient, while Japan's is not. In addition, both Asian option markets seem to be less efficient their US counterpart. This study adds to the knowledge base in the field of volatility forecasting literature as this is the first study to employ OTC index options data. Moreover, this study is also the first of its kind to empirically explore the Hong Kong and Japanese option markets' efficiency. Our findings suggest that both Hong Kong and Japanese index options markets have reached an efficiency level which is comparable to those in advanced markets like US. However, the stock option market in Japan seems inefficient. |
| Rights: | All rights reserved |
| Access: | restricted access |
Files in This Item:
| File | Description | Size | Format | |
|---|---|---|---|---|
| b20661411.pdf | For All Users (off-campus access for PolyU Staff & Students only) | 14.67 MB | Adobe PDF | View/Open |
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