Predicting volatility of the Shanghai silver futures market: What is the role of the U.S. options market?

Abstract

This paper investigates whether the CBOE Silver ETF Volatility Index (VXSLV), which is the implied volatility calculated from the U.S. options market, contains information for predicting the volatility of the Shanghai silver futures market. In particular, we compare its performance with variables observed in the Chinese market. We find both in-sample and out-of-sample evidence that the VXSLV significantly improves daily and weekly volatility forecasts based on realized volatilities. Moreover, when market variables including trading volume, open interest and momentum are included, the VXSLV remains significant and enhances the forecasting performance of the market variables.