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The information content of implied volatility in agricultural commodity markets
Author(s) -
Giot Pierre
Publication year - 2003
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.10069
Subject(s) - volatility (finance) , implied volatility , volatility smile , forward volatility , volatility swap , economics , variance swap , autoregressive conditional heteroskedasticity , volatility risk premium , stochastic volatility , futures contract , econometrics , realized variance , financial economics , conditional variance
In this article we compare the incremental information content of lagged implied volatility to GARCH modelsof conditional volatility for a collection of agricultural commodities traded on the New York Board of Trade. Wealso assess the relevance of the additional information provided by the implied volatility in a risk managementframework. It is first shown that past squared returns only marginally improve the information content providedby the lagged implied volatility. Secondly, value‐at‐risk (VaR) models that relyexclusively on lagged implied volatility perform as well as VaR models where the conditional variance ismodelled according to GARCH type processes. These results indicate that the implied volatility for options onfutures contracts in agricultural commodity markets provides relevant volatility information that can be used asan input to VaR models. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:441–454, 2003