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Implied volatility forecasts in the grains complex
Author(s) -
Simon David P.
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10042
Subject(s) - futures contract , implied volatility , volatility (finance) , economics , volatility smile , volatility swap , forward volatility , volatility risk premium , financial economics , econometrics , realized variance , variance swap
This article finds that the implied volatilities of corn, soybean, and wheat futures options 4 weeks beforeoption expiration have significant predictive power for the underlying futures contract return volatilities throughoption expiration from January 1988 through September 1999. These implied volatilities also encompass theinformation in out‐of‐sample seasonal Glosten, Jagannathan, and Runkle (GJR;1993)volatility forecasts. Evidence also demonstrates that when corn‐implied volatility rises relative toout‐of‐sample seasonal GJR volatility forecasts, implied volatility substantially overpredictsrealized volatility. However, simulations of trading rules that involve selling corn option straddles whencorn‐implied volatility is high relative to out‐of‐sample GJR volatility forecasts indicatethat none of the trading rules would have been significantly profitable. This finding suggests that these optionsare not necessarily overpriced. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:959–981, 2002