<A HREF="../ordert.htm">Order Copy of Paper</A><P>

Market volatility prediction and the efficiency of the S&P 100 index option market

Journal of Financial Economics, 31 (1992) 43-73

Campbell R. Harvey

Duke University, Durham, NC 27706, USA

Robert E. Whaley

Duke University, Durham, NC 27706, USA


Most models of market volatility use either past returns or ex post volatility to forecast volatility. In this paper, the dynamic behavior of market volatility is assessed by forecasting the volatility implied in the transaction prices of Standard & Poor's 100 index options. We test and reject the hypothesis that volatility changes are unpredictable. However, while our statistical model delivers precise forecasts, abnormal returns are not possible in a trading strategy (based on daily out-of-sample volatility projections) which takes transaction costs into account, suggesting that predictable time-varying volatility is consistent with market efficiency.