Abstract
This paper evaluates the ability of alternative option-implied volatility measures to forecast crude-oil return volatility. We find that a corridor implied volatility measure that aggregates information from a narrow range of option contracts consistently outperforms forecasts obtained by the popular Black–Scholes and model-free volatility expectations, as well as those generated by a realized volatility model. This measure ranks favorably in regression-based tests, delivers the lowest forecast errors under different loss functions, and generates economically significant gains in volatility timing exercises. Our results also show that the Chicago Board Options Exchange's “oil-VIX” index performs poorly, as it routinely produces the least accurate forecasts.
| Original language | English |
|---|---|
| Pages (from-to) | 1127-1159 |
| Number of pages | 33 |
| Journal | Journal of Futures Markets |
| Volume | 40 |
| Issue number | 7 |
| Early online date | 13 Apr 2020 |
| DOIs | |
| Publication status | Published - 1 Jul 2020 |
Bibliographical note
© 2020 The Authors. The Journal of Futures Markets published by Wiley Periodicals, Inc.This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited
Keywords
- option-implied volatility
- realized variance
- volatility forecasting