TY  - JOUR
AU  - Andersen,Torben G.
AU  - Bondarenko,Oleg
TI  - Construction and Interpretation of Model-Free Implied Volatility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13449
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13449
L1  - http://www.nber.org/papers/w13449.pdf
N1  - Author contact info:
Torben G. Andersen
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL  60208
Tel: 847/467-1285
Fax: 847/491-5719
E-Mail: t-andersen@kellogg.northwestern.edu

Oleg Bondarenko
Department of Finance
University of Illinois
2419 University Hall
601 S. Morgan Street  MC 168
Chicago, IL 60607-7124
Tel: 312/996-2362
Fax: 312/413-7948
E-Mail: olegb@uic.edu
AB  - The notion of model-free implied volatility (MFIV), constituting the basis for the highly publicized VIX volatility index, can be hard to measure with accuracy due to the lack of precise prices for options with strikes in the tails of the return distribution. This is reflected in practice as the VIX index is computed through a tail-truncation which renders it more compatible with the related concept of corridor implied volatility (CIV). We provide a comprehensive derivation of the CIV measure and relate it to MFIV under general assumptions. In addition, we price the various volatility contracts, and hence estimate the corresponding volatility measures, under the standard Black-Scholes model. Finally, we undertake the first empirical exploration of the CIV measures in the literature. Our results indicate that the measure can help us refine and systematize the information embedded in the derivatives markets. As such, the CIV measure may serve as a tool to facilitate empirical analysis of both volatility forecasting and volatility risk pricing across distinct future states of the world for diverse asset categories and time horizons.
ER  -