Abstract
In this article, we empirically investigate the relationship between realized and risk-neutral volatilities by applying the model-free measures to FTSE-100 index and index options from April 1992 to March 2005. Based on the deviation between the risk-neutral and the physical volatilities, we estimate the volatility spread through the Generalized Method of Moments (GMM) and reveal the volatility risk aversion.
Notes
1Egelkraut and Garcia (Citation2008) adopt a different model-free methodology to reveal option-implied volatility.