Recovering Implied Volatility

Ohad Kadan (), Fang Liu () and Xiaoxiao Tang ()
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Ohad Kadan: W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Fang Liu: Cornerstone Research, New York, New York 10022
Xiaoxiao Tang: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080

Management Science, 2024, vol. 70, issue 1, 255-282

Abstract: We propose a methodology for estimating option-implied, forward-looking variances and covariances of assets and portfolios, which may not possess actively traded options. Our approach relies on the observation that, if asset returns follow a factor structure, then the variances and covariances of the factors span the systematic variances and covariances of assets. We implement the methodology empirically and show that our forward-looking moment estimates provide useful implications for the prediction of jumps and for portfolio choice.

Keywords: options; implied volatility; factor models (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:255-282

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