Market Measures - January 27, 2021 - The Efficiency of Implied Volatility
IV is extremely efficient in terms of overstating the frequency in which implied moves will be larger than actual moves...regardless of the underlying IV, implied moves overstated actual moves more than the theoretical 68% of the time. IV is also efficient in terms of the magnitude of the difference between implied moves and actual moves...regardless of the underlying IV, the spread between IV and HV does not change much. Although 2020 skewed the HV numbers up for the tested underlyings, it did not skew the consistency in the IV-HV spread as the underlying IV went up, nor did it skew the frequency of overstatement.