The optimal corridor for implied volatility: From periods of calm to turmoil

Corridor implied volatility is obtained from model-free impliedvolatility by truncating the integration domain between two barri-ers. Empirical evidence on volatility forecasting in various marketspoints to the utility of trimming the risk-neutral distribution ofthe underlying stock price, in order to obtain unbiased measuresof future realized volatility. The aim of this paper is to investigatethe optimal corridor of strike prices for volatility forecasting in theItalian market, by analyzing numerous symmetric and asymmet-ric corridors in a dataset for the years 2005–2010 spanning both arelatively calm period and a period of turmoil. The results indicatethat put prices, providing information on the probability of a down-turn of the underlying asset, provide the best indication of futurerealized volatility, particularly in a period of turmoil.