Implied Volatility Forecasting Realized Volatility

This chapter conducts an empirical analysis of IV to forecast the RV through testing hypothesis 1–9. The analysis includes three steps. First, estimate the IV for ATM price of currency options with 1-, 2-, and 3-month maturity during opening, midday, and closing period. Second, estimate the RV of currency to use as the proxy for the actual volatility. Finally, assess the performance of IV to forecast RV accurately for the within-week, 1-week, and 1-month forecast horizon. The findings indicate that the IV with different options maturity subsumes the relevant information of underlying currency volatility for different forecast horizons. IV obtained from the early of a week (Monday or Tuesday) and later of a week (Thursday) contain relevant information to forecast RV for the within-week forecast horizon. The information content embedded in IV from early of a week (Monday or Tuesday) is informative to forecast RV for the 1-week and 1-month forecast horizon.