The model-free implied volatility and its information content

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor's 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black-Scholes (B-S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.