The Optimal Corridor for Implied Volatility: from Calm to Turmoil Periods

Corridor implied volatility is obtained from model-free implied volatility by truncating the integration domain between two barriers. Empirical evidence on volatility forecasting, in various markets, points to the utility of trimming the risk-neutral distribution of the underlying stock price, in order to obtain unbiased measures of future realised volatility (see e.g. [9], [3]). The aim of the paper is to investigate, both in a statistical and in an economic setting, the optimal corridor of strike prices to use for volatility forecasting in the Italian market, by analysing a data set which covers the years 2005-2010 and span both a relatively tranquil and a turmoil period