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Much research has addressed the relative performance of option implied volatilities and econometric model based forecasts in terms of forecasting asset return volatility. The general pattern is that implied volatility is a superior forecast. Some authors attribute this to the fact that option markets use a wider information set when forming their forecasts of volatility. An alternative reason may be that the way in which historical data is used differs across the forecasting approaches. This paper considers these issues and determines whether S&P 500 implied volatility reflects a set of economic information beyond its impact on the prevailing level of volatility.
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