Abstract
The aim of this paper is to comprehensively compare option-based measures of volatility, with the ultimate plan of devising a new volatility index for the Italian stock market. The performance of the different implied volatility measures in forecasting future volatility is evaluated both in a statistical and in an economic setting. The properties of the implied volatility measures are also explored, by looking at both the contemporaneous relationship between implied volatility changes and market returns and the usefulness of the proposed index in forecasting future market returns. The results of the paper are of practical importance for both policy-makers and investors. The volatility index, based on corridor measures, could be used to forecast market volatility, for value at risk purposes, in order to determine trading strategies on the underlying index and as an early warning for future market conditions.
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