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Forecasting Volatility With Spot Index and Index Futures: Evidence From Taiwan

In this article, we use the volatility of the Taiwan Stock Index (TAIEX) and its futures in the encompassing regression model to respectively make asynchronous forecasts of realized volatility (RV) and implied volatility (IV). Initially, we discover that, to obtain a stationary RV with a stable, long memory parameter, the optimal sampling intervals for the intraday return were 9 and 30 minutes. We uncover that the spot volatility is more predictive of RV than the futures volatility. To forecast IV, the volatility of futures has more information content, helping to improve overall forecast performance. The result implies that the underlying asset of the TAIEX options (TXO) is approximately the index futures rather than the spot index, owing mainly to the demands for hedging and arbitrage from the TXO holders. Finally, we confirm the forecasting capability of our various models via extensive forecasting error and simulation exercises.