INFORMATIONAL EFFICIENCY OF THE US MARKETS FOR IMPLIED VOLATILITY BEFORE AND AFTER THE COVID-19 PANDEMIC

Abstract

The objective of this work is to assess informational efficiency in four US markets for implied volatility. This has been pursued using daily data over 2015 to 2021 and a composite index that accounts for three possible sources of inefficiency associated with long-range dependence, short-range dependence, and entropy. The dominant pattern of long-range dependence has been that of anti-persistence both before and during the pandemic. The same applies for short-range dependence, especially before the pandemic. The presence of anti-persistence is an indication of investors’ over-reaction to incoming information and implies that oscillatory trading strategies have been probably more successful that trend-following ones. During the Covid-19 pandemic, the entropy decreased in all cases suggesting that the four implied volatility series became more predictable; the intensity, however, of long-range and short-range dependence remained largely unaffected. As a result of these developments, the informational efficiency in at least two markets (those related to stock and to crude oil) fell.