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

Viktor Todorov and Yang Zhang

Journal of Applied Econometrics, 2022, vol. 37, issue 2, 368-391

Abstract: 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.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1002/jae.2864

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:japmet:v:37:y:2022:i:2:p:368-391

Ordering information: This journal article can be ordered from
http://www3.intersci ... e.jsp?issn=0883-7252

Access Statistics for this article

Journal of Applied Econometrics is currently edited by M. Hashem Pesaran

More articles in Journal of Applied Econometrics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().