Market Maker's accuracy in predicting volatility across different stock exchanges

Abstract

In the ever-evolving world of speculation on the global stock exchanges, market makers play a significant role in providing liquidity and stability for different participants, both retail investors as well as large institutional actors. One of the key metrics in the work of market makers is the implied volatility that they estimate in order to price the different security options they offer. This study has researched the difference in accuracy of market makers ability to estimate volatility across different geographical markets, namely the Hong Kong stock exchange, the New York stock exchange and the Nasdaq stock exchange. The analysis based on sampling the past three complete calendar years, and conducting 3 separate OLS-regressions, has shown that accuracy differs across markets. The results conclude that the chosen proxy that market makers were most efficient in predicting volatility was SPY, with QQQ close behind, and the HSI far off. The study discusses the reasons for the large discrepancy between the American proxies and the Asian one. One of the potential reasons is the much smaller variance and steady decline in price movement that the HSI has seen throughout the sample period of 2021-2023, while the American indices saw more frequent and more aggressive price fluctuations, leading to higher Implied Volatility.