Forecasting the FTSE 100 volatility: information content of historical, implied and implied stochastic volatilities

A prevailing parameter in the ex ante measurement of option value is the volatility of the underlying asset. Although the abundant literature has proposed a number of different methods for forecasting the future volatility of the underlying asset, the application of these methods in an empirical setting has not always yielded the expected outcomes in terms of consistent estimates. This paper constitutes a further attempt to address the aforementioned issue, by conducting a comprehensive, comparative empirical analysis, utilising data from the FTSE 100 Index European-style options traded at LIFFE. Estimating OLS regressions, IV2SLS regressions and different specifications of GARCH regressions, we conclude that the implied volatility estimate has information content and predictive ability beyond that contained in both the historical and implied stochastic volatility.