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Predicting volatility using the Markov-switching multifractal model: Evidence from S&P 100 index and equity options

Author

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  • Chuang, Wen-I
  • Huang, Teng-Ching
  • Lin, Bing-Huei
Abstract
In this paper, we evaluate the performance of the ability of Markov-switching multifractal (MSM), implied, GARCH, and historical volatilities to predict realized volatility for both the S&P 100 index and equity options. Some important findings are as follows. First, we find that the ability of MSM and GARCH volatilities to predict realized volatility is better than that of implied and historical volatilities for both the index and equity options. Second, equity option volatility is more difficult to be forecast than index option volatility. Third, both index and equity option volatilities can be better forecast during non-global financial crisis periods than during global financial crisis periods. Fourth, equity option volatility exhibits distinct patterns conditional on various equity and option characteristics and its predictability by MSM and implied volatilities depends on these characteristics. And finally, we find that MSM volatility outperforms implied volatility in predicting equity option volatility conditional on various equity and option characteristics.

Suggested Citation

  • Chuang, Wen-I & Huang, Teng-Ching & Lin, Bing-Huei, 2013. "Predicting volatility using the Markov-switching multifractal model: Evidence from S&P 100 index and equity options," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 168-187.
    • Handle: RePEc:eee:ecofin:v:25:y:2013:i:c:p:168-187
    DOI: 10.1016/j.najef.2012.06.007
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    More about this item

    Keywords

    Markov-switching multifractal model; Implied volatility; GARCH; Index and equity options; Global financial crisis;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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