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The Forecasting Efficacy of Risk‐Neutral Moments for Crude Oil Volatility
Author(s) -
Chatrath Arjun,
Miao Hong,
Ramchander Sanjay,
Wang Tianyang
Publication year - 2015
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2331
Subject(s) - volatility (finance) , implied volatility , volatility swap , volatility smile , forward volatility , volatility risk premium , variance swap , econometrics , economics , stochastic volatility , realized variance , financial economics
This paper examines the information content of implied volatility for crude oil options as it relates to future realized volatility. Using data for the period 1996 to 2011 we find that implied volatility is an effective predictor of the month‐ahead realized volatility. We show that implied volatility subsumes the information content of contemporaneous volatility, and it contains incremental information on future volatility after controlling for contemporaneous volatility. Furthermore, incorporating risk‐neutral skewness, and especially kurtosis, improves the forecasting of realized volatility. Overall, the association between implied volatility and month‐ahead realized volatility is consistent with evidence documented for other asset classes, leading us to conclude that implied volatility serves as a reasonable proxy for expected volatility. Copyright © 2015 John Wiley & Sons, Ltd.