Unrealized expectations of jumps in volatility: An explanation to the low and time-varying predictive power of implied volatility
Contribuinte(s) |
Svenska handelshögskolan, Institutionen för finansiell ekonomi och ekonomisk statistik, finansiell ekonomi Swedish School of Economics and Business Administration, Department of Finance and Statistics, Finance |
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Data(s) |
2001
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Resumo |
The low predictive power of implied volatility in forecasting the subsequently realized volatility is a well-documented empirical puzzle. As suggested by e.g. Feinstein (1989), Jackwerth and Rubinstein (1996), and Bates (1997), we test whether unrealized expectations of jumps in volatility could explain this phenomenon. Our findings show that expectations of infrequently occurring jumps in volatility are indeed priced in implied volatility. This has two important consequences. First, implied volatility is actually expected to exceed realized volatility over long periods of time only to be greatly less than realized volatility during infrequently occurring periods of very high volatility. Second, the slope coefficient in the classic forecasting regression of realized volatility on implied volatility is very sensitive to the discrepancy between ex ante expected and ex post realized jump frequencies. If the in-sample frequency of positive volatility jumps is lower than ex ante assessed by the market, the classic regression test tends to reject the hypothesis of informational efficiency even if markets are informationally effective. |
Formato |
1837 bytes 300282 bytes application/pdf text/plain |
Identificador |
http://hdl.handle.net/10227/155 URN:ISBN:951-555-686-4 951-555-686-4 0357-4598 |
Idioma(s) |
en |
Publicador |
Svenska handelshögskolan Swedish School of Economics and Business Administration |
Relação |
Working Papers 457 |
Direitos |
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Palavras-Chave | #forecasting #volatility #peso problem #Finance |
Tipo |
Text |