Causal Relationship between FT-SE 100 Stock Index Futures Volatility and FT-SE 100 Index Options Implied Volatility

The primary objective of this paper is to examine the relationship between historical and implied volatility estimates in order to propose the nature of a model that predicts the future volatility. For this scope, we used non-overlapping clustering of observed futures volatility and implied volatility estimates from options on futures. Three types of implied volatility were used (ATM, NTM (calls), NTM (puts)). Standard deviation of logarithmic returns was used to represent historical volatility. In turn, we utilise Augmented Dickey-Fuller (ADF) unit root tests in order to check the time series properties of the data before running Granger tests of causality between several types of historical and implied volatility