Volatility in Stock Index Futures and the Informational Content of Option Prices PDF Download

Author: Hun Y. Park
Publisher:
ISBN:
Category :
Languages : en
Pages : 14

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Author: Louis O. Scott
Publisher: International Monetary Fund
ISBN: 1451932553
Category : Business & Economics
Languages : en
Pages : 42

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Prices in futures markets and option markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia. Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market’s expectations for future volatility of spot prices. Do these prices accurately reflect market expectations? The purpose of this paper is to examine the information that is reflected in futures prices and option prices. The issue is examined by reviewing both the relevant analytical models and the empirical evidence.

Author: Stephen J. Taylor
Publisher:
ISBN:
Category :
Languages : en
Pages : 64

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The volatility information content of stock options for individual firms is measured using option prices for 149 U.S. firms during the period from January 1996 to December 1999. Volatility forecasts defined by historical stock returns, at-the-money (ATM) implied volatilities and model-free (MF) volatility expectations are compared for each firm. The recently developed model-free volatility expectation incorporates information across all strike prices, and it does not require the specification of an option pricing model.Our analysis of ARCH models shows that, for one-day-ahead estimation, historical estimates of conditional variances outperform both the ATM and the MF volatility estimates extracted from option prices for more than one-third of the firms. This result contrasts with the consensus about the informational efficiency of options written on stock indices; several recent studies find that option prices are more informative than daily stock returns when estimating and predicting index volatility. However, for the firms with the most actively traded options, we do find that the option forecasts are nearly always more informative than historical stock returns. When the prediction horizon extends until the expiry date of the options, our regression results show that the option forecasts are more informative than forecasts defined by historical returns for a substantial majority (86%) of the firms. Although the model-free (MF) volatility expectation is theoretically more appealing than alternative volatility estimates and has been demonstrated to be the most accurate predictor of realized volatility by Jiang and Tian (2005) for the Samp;P 500 index, the results for our firms show that the MF expectation only outperforms both the ATM implied volatility and the historical volatility for about one-third of the firms. The firms for which the MF expectation is best are not associated with a relatively high level of trading in away-from-the-money options.

Author: Martin Mandler
Publisher: Springer Science & Business Media
ISBN: 3642574289
Category : Business & Economics
Languages : en
Pages : 227

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This book is a slightly revised version of my doctoral dissertation which has been accepted by the Department of Economics and Business Administration of the Justus-Liebig-Universitat Giessen in July 2002. I am indebted to my advisor Prof. Dr. Volbert Alexander for encouraging and supporting my research. I am also grateful to the second member of the doctoral committee, Prof. Dr. Horst Rinne. Special thanks go to Dr. Ralf Ahrens for providing part of the data and to my colleague Carsten Lang, who spent much time reading the complete first draft. Wetzlar, January 2003 Martin Mandler Contents 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Part I Theoretical Foundations 2 Arbitrage Pricing and Risk-Neutral Probabilities........ .. 7 2.1 Arbitrage Pricing in the Black/Scholes-Merton Model... . . .. . 7 2.2 The Equivalent Martingale Measure and Risk-Neutral Valuation ............................................... 11 2.3 Extracting Risk-Neutral Probabilities from Option Prices. . . .. 13 2.4 Summary............................................... 15 Appendix 2A: The Valuation Function in the Black/Scholes-Merton Model .................................................. 16 Appendix 2B: Some Further Details on the Replication Strategy ... 21 3 Survey of the Related Literature .......................... 23 3.1 The Information Content of Forward and Futures Prices. . . .. . 24 3.2 The Information Content of Implied Volatilities ............. 25 3.2.1 Implied Volatilities and the Risk-Neutral Probability Density .......................................... 27 3.2.2 The Term Structure of Implied Volatilities. . . . . . . .. . . 29 . 3.2.3 The Forecasting Information in Implied Volatilities. . .. 30 3.2.4 Implied Correlations as Forecasts of Future Correlations 43 VIII Contents 3.3 The Skewness Premium ..... . . . . . . . . . . . . . . . . . . .. . . 45 . . . . . . .

Author: Stephen Satchell
Publisher: Springer
ISBN: 1137554177
Category : Science
Languages : en
Pages : 416

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Over the last 20 years hedge funds and derivatives have fluctuated in reputational terms; they have been blamed for the global financial crisis and been praised for the provision of liquidity in troubled times. Both topics are rather under-researched due to a combination of data and secrecy issues. This book is a collection of papers celebrating 20 years of the Journal of Derivatives and Hedge Funds (JDHF). The 18 papers included in this volume represent a small sample of influential papers included during the life of the Journal, representing industry-orientated research in these areas. With a Preface from co-editor of the journal Stephen Satchell, the first part of the collection focuses on hedge funds and the second on markets, prices and products.

Author: Sheldon Natenberg
Publisher: McGraw Hill Professional
ISBN: 155738486X
Category : Business & Economics
Languages : en
Pages : 485

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Provides a thorough discussion of volatility, the most important aspect of options trading. Shows how to identify mispriced options and to construct volatility and "delta neutral" spreads.

Author: Sophie Xiaoyan Ni
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40 percent as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.

Author: Hassanali Besharat Ehsani
Publisher:
ISBN:
Category : Stock index futures
Languages : en
Pages : 224

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Author: Bart Frijns
Publisher:
ISBN:
Category :
Languages : en
Pages : 38

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In this paper we develop and evaluate the information content of an implied volatility index for the Australian stock market. Using price data on Samp;P/ASX 200 index options and SFE SPI 200 index futures options, we develop implied volatility indices with a time to maturity of three months and one month, respectively. When evaluating the information content of both implied volatility indices we find that the implied volatility index based on the Samp;P/ASX 200 index options with a three-month horizon is most informative in terms of explaining stock market returns and forecasting future volatility. For this implied volatility index we find a significant negative and asymmetric relationship between changes in implied volatility and Samp;P/ASX 200 returns, i.e., stock market prices decline more when implied volatility increases than they increase when implied volatility drops. When evaluating the forecasting power of implied volatility for future market volatility we find that the implied volatility index based on the Samp;P/ASX 200 index options contains important information both insample and out-of-sample. In-sample, the implied volatility index significantly improves the fit of a GJR-GARCH(1, 1) model. Out-of-sample, we find that the implied volatility index significantly outperforms the RiskMetrics and GJR-GARCH(1, 1) model, with its highest forecasting power at the one-month forecasting horizon.

Author: Joseph A. Cherian
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 42

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