The relationship between implied volatility and autocorrelation

Faff, Robert W. and McKenzie, Michael D. (2007) The relationship between implied volatility and autocorrelation. International Journal of Managerial Finance, 3 2: 191-196. doi:10.1108/17439130710738736

Author Faff, Robert W.
McKenzie, Michael D.
Title The relationship between implied volatility and autocorrelation
Journal name International Journal of Managerial Finance   Check publisher's open access policy
ISSN 1743-9132
Publication date 2007
Sub-type Article (original research)
DOI 10.1108/17439130710738736
Volume 3
Issue 2
Start page 191
End page 196
Total pages 6
Place of publication United Kingdom
Publisher Emerald Group Publishing Ltd.
Language eng
Formatted abstract
Purpose -
This paper empirically assesses the determinants of conditional stock index autocorrelation with particular emphasis on the impact of return volatility that are theoretically linked through the behaviour of feedback traders.

Design/methodology/approach -

The S&P 100, 500 and the NASDAQ 100 index are considered and volatility in each series is captured using option-implied estimates taken from the Chicago Board Options Exchange. A seemingly unrelated regression approach is used in which trading volume and volatility are simultaneously modelled.

Findings -
The results of this study suggest that low or even negative return autocorrelations are more likely in situations where: return volatility is high; price falls by a large amount; traded stock volumes are high; and the economy is in a recessionary phase.

Research limitations/implications -

The results confirm that previous related work showing a link between autocorrelation and volatility is not induced by a mechanical relation.

Practical implications -
Usage of endogenously determined volatility measures in this area of the literature is justified.

Originality/value -
This study provides a robustness test of the autocorrelation/volatility relation, as well as a further exploration of the utility inherent in option-implied volatility. © Emerald Group Publishing Limited.
Keyword Stock markets
United States of America
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Unknown

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
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Citation counts: Scopus Citation Count Cited 3 times in Scopus Article | Citations
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Created: Fri, 04 Mar 2011, 11:55:00 EST by Karen Morgan on behalf of UQ Business School