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Applied Economics Letters Volume 17, 2010 - Issue 18
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Original Articles

The model-free measures and the volatility spread

Jian Chen Essex Business School, University of Essex, Colchester, CO4 3SQ, UK
&
Xiaoquan Liu Essex Business School, University of Essex, Colchester, CO4 3SQ, UKCorrespondence[email protected]
Pages 1829-1833 | Published online: 21 Apr 2010
 
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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.

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