THE TERM STRUCTURE OF IMPLIED FORWARD VOLATILITY: RECOVERY AND INFORMATIONAL CONTENT IN THE CORN OPTIONS MARKET

Thorsten M. Egelkraut, Philip Garcia and Bruce Sherrick

No 18983, 2003 Conference, April 21-22, 2003, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: Options with different maturities can be used to generate volatility estimates for non-overlapping future time intervals. This paper develops the term structure of volatility implied by corn futures options, and evaluates the informational content of the implied forward volatility as a predictor of subsequent realized volatility. Using data from 1987-2001 and employing a flexible method to obtain the implied forward volatilities, two types of information are examined: 1) the market's estimate of future realized volatility for the nearby interval of the term structure and, 2) the market's expectation of the direction and magnitude of change of future realized volatility over time. In contrast to previous research, the results indicate that the implied forward volatilities anticipate the realized volatilities provide unbiased forecasts and capture a larger portion of the systematic variability in the realized volatilities than forecasts based on historical volatilities. Using information on the direction and magnitude of change in volatility over time, we find that the early-year options forecast volatility about as well as the three-year moving average and better than the naive forecast, while later-year options and alternative forecasts are less able to predict the direction and magnitude of changing volatility. During this later-year period, the implied forward volatilities tend to over-predict the magnitude of actual volatility. Overall, we find that the term structure of volatility implied by corn futures options contains information on future realized volatility.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 25
Date: 2003
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrthr:18983

DOI: 10.22004/ag.econ.18983

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