Using Implied Volatility on Options to Measure the Relation Between Asset Retums and Variability

W. Davidson, J. Kim, E. ÖRS, A. Szakmary

Journal of Banking and Finance

July 2001, vol. 25, n°7, pp.1245-1269

Departments: Finance, GREGHEC (CNRS)

Prior research has documented that volatility in financial asset markets is most directly related to trading rather than calendar days, and that there is an inverse asymmetric relation between volatility and returns in both stocks and long-term bonds. We examine these relations in 37 futures options markets representing a wide variety of asset types. Using futures prices and implied volatilities from this extensive array of markets, we confirm that in all of them, save one, market volatility is more directly related to trading days. However, the nature of the association between implied volatility and underlying asset returns varies greatly across asset categories and across exchanges. Thus, we show that findings from equity markets apparently are not generalizable to other asset classes.