Assessing the Effectiveness of Implied Volatility in Predicting Realised Return Volatility for Informative Decision-Making: Insights from the Nifty Bank Index
Bank Nifty; Black-Scholes Model; Derivatives; Implied Volatility; Market Efficiency; Option Pricing; Options
Implied volatility (IV) is crucial in option pricing models and serves as an essential tool for volatility traders to make informed decisions. However, its effectiveness in predicting realized return volatility is still debated. This study investigates the efficiency of implied volatility in forecasting realized return volatility in the Indian financial markets, specifically using Bank Nifty index options and also assesses the predictive capability of implied volatility against the realised volatility estimator. Utilizing data spanning five years, from January 2018 to December 2022. Finding of this study reveal that implied volatility significantly forecasts realized volatility, highlighting its efficacy as a forecasting tool. Moreover, historical volatility fails to enhance predictive power when combined with implied volatility. Nonetheless, caution should be exercised in generalizing these results to other markets or time periods, as further research is warranted. The study contributes to the ongoing discourse on implied volatility efficiency, offering practical insights for options traders and adding to the body of knowledge in financial economics. 2024, Iquz Galaxy Publisher. All rights reserved.
Sam S.; Pachiyappan S.; Vellaiyan S.; Deepika S.R.; John Paul Raj V.
International Research Journal of Multidisciplinary Scope, Vol-5, No. 4, pp. 568-578.
https://doi.org/10.47857/irjms.2024.v05i04.01153 https://www.scopus.com/inward/record.uri?eid=2-s2.0-85210432523&doi=10.47857%2firjms.2024.v05i04.01153&partnerID=40&md5=e7221e97f4cbf2382b5c7aff591ce27f
Sam S., School of Business and Management, Christ University, Karnataka, Bangalore, India; Pachiyappan S., School of Business and Management, Christ University, Karnataka, Bangalore, India; Vellaiyan S., School of Business and Management, Christ University, Karnataka, Bangalore, India; Deepika S.R., School of Business and Management, Christ University, Karnataka, Bangalore, India; John Paul Raj V., School of Business and Management, Christ University, Karnataka, Bangalore, India