Implied volatility fails to beat GJR-GARCH in Value-at-Risk forecasts.
The study compared two models for predicting financial risk in stock market indices over 20 years. The historical volatility model outperformed the implied volatility model in forecasting Value-at-Risk. This is because implied volatility includes a risk premium that distorts predictions. Adjusting for this bias did not improve the performance of the implied volatility model. The findings challenge the common belief that implied volatility is better for forecasting stock market volatility.