Volatility Forecasts Embedded in the Prices of Crude-Oil Options

Leonidas Tsiaras*, Dudley Gilder

*Corresponding author for this work

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)1127-1159
Number of pages33
JournalJournal of Futures Markets
Volume40
Issue number7
Early online date13 Apr 2020
DOIs
Publication statusPublished - 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

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