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Some Evidence on Option Prices as Predictors of Volatility

Malcolm Edey and Graham Elliott ()

Oxford Bulletin of Economics and Statistics, 1992, vol. 54, issue 4, 567-78

Abstract: This paper investigates the efficiency of Australian options market using a version of the Black-Scholes model. Under the joint null hypothesis that the pricing model is valid, and that forecasts are efficient, the implied volatilities calculated from observed.option prices should be efficient predictors of squared changes in the prices of the underlying securities on which the options are written. This hypothesis is tested using weekly data on prices of Australian financial futures options, and over-the-counter options in the Australian dollar/U.S. dollar currency market. The results indicate significant forecasting biases for each of the contracts studied. In each case, movements in implied volatilities appear to overstate changes in the true volatility of underlying prices. Copyright 1992 by Blackwell Publishing Ltd

Date: 1992
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Handle: RePEc:bla:obuest:v:54:y:1992:i:4:p:567-78