Extrapolation and option-implied kurtosis in volatility forecasting

Ging-Ginq Pan, Yung-Ming Shiu and Tu-Cheng Wu

Pacific-Basin Finance Journal, 2024, vol. 84, issue C

Abstract: Prior studies have employed extrapolation to reduce truncation errors when computing risk-neutral moments. However, extrapolation may have a disadvantage in that it obscures the predictive power of risk-neutral skewness and kurtosis. Our out-of-sample results show that extrapolation does not enhance the predictive power of the volatility forecasting models when risk-neutral volatility, skewness, and kurtosis are included. Under this model specification, extrapolation generates less accurate forecasts and obscures the performance of risk-neutral kurtosis in volatility forecasting.

Keywords: Extrapolation; Risk-neutral skewness; Risk-neutral kurtosis; Volatility forecasting (search for similar items in EconPapers)
JEL-codes: C13 C52 C53 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:84:y:2024:i:c:s0927538x24000374

DOI: 10.1016/j.pacfin.2024.102286

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