Volatility forecasts embedded in the prices of crude-oil options

Gilder, Dudley ORCID: https://orcid.org/0000-0001-7039-762X and Tsiaras, Leonidas 2020. Volatility forecasts embedded in the prices of crude-oil options. Journal of Futures Markets 40 (7) , pp. 1127-1159. 10.1002/fut.22114

Preview

PDF - Accepted Post-Print Version Download (591kB) | Preview

Abstract

This paper evaluates and compares the ability of alternative option-implied volatility measures to forecast the monthly realized volatility of crude-oil returns. We find that a corridor implied volatility measure that aggregates information from a narrow range of option contracts consistently outperforms forecasts obtained by the popular Black-Scholes and model-free volatility expectations, as well as those generated by a high-frequency realized volatility model. In particular, this measure ranks favorably in all regression-based tests, delivers the lowest forecast errors under either symmetric or asymmetric loss functions, and generates economically significant gains in volatility timing exercises. We also find that that the CBOE's ``oil-VIX'' (OVX) index performs poorly, as it routinely produces the least accurate forecasts. Our narrow corridor measure continues to outperform other alternatives when we construct volatility forecasts using options on the United States Oil Fund (USO), i.e. the ETF that underlies the calculation of the OVX.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Wiley
ISSN:	0270-7314
Date of First Compliant Deposit:	2 June 2020
Date of Acceptance:	26 February 2020
Last Modified:	16 Nov 2024 11:45
URI:	https://orca.cardiff.ac.uk/id/eprint/130055

Citation Data

Cited 1 time in Scopus. View in Scopus. Powered By Scopus® Data

Actions (repository staff only)

Edit Item