Forecasting volatility in the Spanish option market

Abstract

The performance of several alternative forecasts for the Ibex-35 index options market data is compared and a test for market efficiency of the Spanish Option Market with respect to volatility forecasts provided. The forecasts include time series, implied volatilities and composite specifications using both parametric and nonparametric ways. It is found that the choice of the best model depends on the error measurement that depends on the ultimate purpose of the forecasting procedure. Also the results generated from an ex ante arbitrage strategy are not different from zero at conventional significance levels once the transaction costs are taken into account. This result supports the hypothesis of the market efficiency of the Spanish Option Market.