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RFS Advance Access originally published online on May 25, 2005
Review of Financial Studies 2005 18(4):1305-1342; doi:10.1093/rfs/hhi027
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

The Model-Free Implied Volatility and Its Information Content

George J. Jiang
Eller College of Management, University of Arizona

Yisong S. Tian
Schulich School of Business, York University

Address correspondence to Yisong S. Tian, Finance Area, Schulich School of Business, York University, 4700 Keele Street, Toronto, ON M3J 1P3, or e-mail: ytian{at}schulich.yorku.ca.

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor’s 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black–Scholes (B–S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.


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