Information gains from using short‐dated options for measuring and forecasting volatility

Bibliographic Data

ID21653597
AuthorsViktor Todorov (0000-0002-2360-7812, Kellogg School of Management Northwestern University Evanston Illinois USA, corresponding author), Yang Zhang (0000-0001-6777-3487, Kellogg School of Management Northwestern University Evanston Illinois USA)
Year2022
Volume37
Issue2
Pages368-391
Publication date2022-03-01
Open AccessYes
TypeARTICLE
VenueJournal of Applied Econometrics (JOURNAL)
Journal identifiersISSN: 1099-1255 • E-ISSN: 0883-7252
PublisherWiley (PUBLISHER • GB)
DOI10.1002/jae.2864
OpenAlexW3184797258
LanguageEN
References cited53

We study the gains from using short‐dated options for volatility measurement and forecasting. Using option portfolios, we estimate nonparametrically spot volatility under weak assumptions for the underlying asset. This volatility estimator complements existing ones constructed from high‐frequency returns. We show empirically, using the market index and Dow 30 stocks, that combining optimally return and option data can lead to nontrivial gains for volatility forecasting. These gains are due to “diversification” of the measurement error in the two volatility proxies. The information content of short‐dated options, not spanned by the current spot volatility, is of limited relevance for volatility forecasting

Business · Econometrics · Economics · Estimator · Financial economics · Forward volatility · Implied volatility · Realized variance · Statistics · Stochastic volatility · Variance swap · Volatility risk premium · Volatility smile · Volatility swap · Financial Risk and Volatility Modeling · Market Dynamics and Volatility · Mathematics · Stochastic processes and financial applications

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