Implied volatility surface predicts future market movements with high accuracy.
The study found that using information from the implied volatility surface can help predict future volatility up to a week ahead. Trading strategies based on this predictability can lead to significant gains after accounting for costs. The results also show that how the implied volatility surface is modeled affects the outcomes. By applying a two-factor stochastic volatility model, the researchers found that both long- and short-term variance factors play a role in explaining implied volatility.