Properties and the predictive power of implied volatility in the New Zealand dairy market

This study develops a dairy implied volatility index (DVIX), derived from New Zealand Exchange traded options on whole milk powder (WMP) futures. We document an inverse return–volatility relation which is asymmetric, where increases in WMP futures prices are associated with larger absolute changes in the DVIX than decreases. In sample, the results strongly suggest that the DVIX has a high information content regarding conditional variance and that the inclusion of historical information further improves the predictive power. Out of sample, we find that the DVIX provides substantial information about future realized volatility. We also document that a combination of historical volatility and the DVIX provides the best out‐of‐sample forecasts.