On the predictability of model-free implied correlation

Chryssa Markopoulou, Vasiliki Skintzi and Apostolos Refenes

International Journal of Forecasting, 2016, vol. 32, issue 2, 527-547

Abstract: This paper investigates the existence of predictable patterns in the evolution of the implied correlation series. To this end, alternative time-series specifications are employed to model the correlation dynamics, and the statistical and economic significance of out-of sample forecasts is assessed. The statistical measures provide strong evidence in favor of predictable patterns in the S&P 100 options market. A trading strategy designed to exploit daily changes in the series can yield abnormal profits; however, these profits disappear when transaction costs are incorporated. We conclude that the efficient market hypothesis cannot be rejected.

Keywords: Predictability; Implied correlation; Combining forecasts; Market efficiency; Option strategy (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:32:y:2016:i:2:p:527-547

DOI: 10.1016/j.ijforecast.2015.09.008

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