The Predictive Power of Implied Volatility of Options Traded OTC and on Exchanges

• DOI: 10.2139/ssrn.1311766
• Publication Date: 2011-12-28T17:58:52Z
• Authors: Wayne Yu; Evans Lui; Jacqueline Wang
• Keywords: 0502 economics and business; 05 social sciences

This paper investigates the efficiency of stock index options traded over-the-counter (OTC) and on the exchanges in Hong Kong and Japan. Our findings suggest that implied volatility is superior to either historical volatility or a GARCH-type volatility forecast in predicting future volatility in both the OTC and exchange markets. We also compare the predictive power of the implied volatility of options traded OTC to that of exchange-traded options and find evidence that the OTC market is more efficient than the exchange in Japan, but that the opposite is true in Hong Kong.