The stochastic behavior of market volatility implied in the prices of index options and a test of market efficiency

Despite the strong implications of the implied volatility as an estimate of market volatility, there exists relatively little empirical research on this subject, especially at the daily level. This study examines the properties of the daily volatility implied in the S&P 100 index option prices, and investigates the effect of major scheduled macroeconomic announcements and relevant financial and real variables on volatility changes. The study also tests the efficiency of the S&P 100 option market by simulating a straddle trading strategy. In carrying out the empirical tests, accurate estimation of the implied volatility is emphasizes as well as the application of various econometric specifications that differ from those uses in previous studies. In addition, the study compares the performance of the implied volatility regression model with GARCH-type models which are generally regarded as one of the more reliable forecast tools.