The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation
Peter Christoffersen,
Bruno Feunou,
Kris Jacobs and
Nour Meddahi
Journal of Financial and Quantitative Analysis, 2014, vol. 49, issue 3, 663-697
Abstract:
Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so, we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas, and we assess the option valuation properties using Standard & Poor’s (S&P) 500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity, and volatility levels.
Date: 2014
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Working Paper: The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation (2012) 
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:49:y:2014:i:03:p:663-697_00
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