Information gains from using short-dated options for measuring and forecasting volatility

Viktor Todorov*, Yang Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We study the gains from using short-dated options for volatility measurement and forecasting. Using option portfolios, we estimate nonparametrically spot volatility under weak assumptions for the underlying asset. This volatility estimator complements existing ones constructed from high-frequency returns. We show empirically, using the market index and Dow 30 stocks, that combining optimally return and option data can lead to nontrivial gains for volatility forecasting. These gains are due to “diversification” of the measurement error in the two volatility proxies. The information content of short-dated options, not spanned by the current spot volatility, is of limited relevance for volatility forecasting.

Original languageEnglish (US)
JournalJournal of Applied Econometrics
DOIs
StateAccepted/In press - 2021
Externally publishedYes

Keywords

  • high-frequency data
  • nonparametric volatility estimation
  • options
  • return predictability
  • volatility forecasting

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Information gains from using short-dated options for measuring and forecasting volatility'. Together they form a unique fingerprint.

Cite this