THE INFORMATIONAL CONTENT OF IMPLIED VOLATILITY

Implied volatility is widely believed to be informationally superior t o historical volatility, because it is the ''market's'' forecast of fu ture volatility. But for S&P 100 index options, the most actively trad ed contract in the United States, we find implied volatility to be a p oor forecast of subsequent realized volatility. In aggregate and acros s subsamples separated by maturity and strike price, implied volatilit y has virtually no correlation with future volatility, and it does not incorporate the information contained in recent observed volatility.