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Abstract

This study develops an implied volatility index for the Australian stock market, termed as the AVX, and assesses its information content. The AVX is constructed using S&P/ASX 200 index options with a constant time-to-maturity of three months. It is observed that the AVX has a significant negative and asymmetric relationship with S&P/ASX 200 returns. When evaluating the forecasting power of the AVX for future stock market volatility, it is found that the AVX contains important information both in-sample and out-of-sample. In-sample, the AVX significantly improves the fit of a GJR-GARCH(1, 1) model. Out-of-sample, the AVX significantly outperforms the RiskMetrics approach and the GJR-GARCH(1, 1) model, with its highest forecasting power at the one-month forecasting horizon. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:134–155, 2010