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Volatility Information in the Trading Activity of Stocks, Options, and Volatility Options

Authors


  • I am grateful for helpful comments from Chuang-Chang Chang, San-Lin Chung, Ming Guo, and the seminar participants at National Central University, National Chi Nan University, Providence University, the 2012 KFA & TFA Joint Conference in Finance, and the 2012 International Conference on Futures and Derivative Markets. I thank the National Science Council of Taiwan (project no. NSC 101-2410-H-002-001) and National Taiwan University (project no. 101R7743) for the financial support provided for this study.

Correspondence author, Department of Finance, College of Management, National Taiwan University, No. 1, Section 4, Roosevelt Road, Taipei 106, Taiwan. Tel: +886-2-3366-1092, Fax: +886-2-8369-5581, e-mail: wangyh@ntu.edu.tw

Abstract

We investigate the information content of trading activity in S&P 500 component stocks, S&P 500 index options and VIX options on the future realized volatility (RV) of S&P 500 index returns and find that the only consistently useful information on the determination of future RV is provided by trading activity in VIX calls. We also find a discernible increase in the level of predictability when investors are more worried, when the level of information asymmetry in the VIX call market is higher, and when the transaction costs of VIX calls are lower, relative to S&P 500 index options.

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