Economics at your fingertips  

Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities

Christopher G Lamoureux and William Lastrapes ()

Review of Financial Studies, 1993, vol. 6, issue 2, 293-326

Abstract: We examine the behavior of measured variances from the options market and the underlying stock market. Under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model, forecasts from time-series models of the stock-return process should not have predictive content given the market forecast as embodied in option prices. Both in-sample and out-of-sample tests suggest that this hypothesis can be rejected. Using simulations, we show that biases inherent in the procedure we use to imply variances cannot explain this result. Thus, we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced. These results also have implications for optimal variance forecast rules. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1993
References: Add references at CitEc
Citations: View citations in EconPapers (195) Track citations by RSS feed

Downloads: (external link) full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See for details.

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:

Ordering information: This journal article can be ordered from

Access Statistics for this article

Review of Financial Studies is currently edited by Itay Goldstein

More articles in Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().

Page updated 2023-06-16
Handle: RePEc:oup:rfinst:v:6:y:1993:i:2:p:293-326