Power of Implied Volatility

Paper about implied volatility and its forecasting power.


SSRN-Forecasting Power of Implied Volatility: Evidence from Individual Equities by Jonathan Godbey, James Mahar: "Assuming use of the correct option pricing model and an efficient market, an option's implied volatility is the market's consensus forecast of future realized volatility over the remaining life of that option. We examine 460 of the S&P 500 firms to demonstrate that 1) implied volatility is a better forecaster of realized volatility than historic volatility or GARCH models and 2) the information content of implied volatility significantly decreases with liquidity. Since individual equity options are American style, we obtain implied volatility from calls and puts separately rather than only calls or pooled data. "