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A random walk down the options market
Author(s) -
Jiang George J.,
Tian Yisong S.
Publication year - 2012
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.20528
Subject(s) - random walk , martingale (probability theory) , econometrics , autocorrelation , random walk hypothesis , economics , autoregressive model , variance (accounting) , mathematics , efficient market hypothesis , martingale difference sequence , statistics , geography , accounting , stock market , context (archaeology) , archaeology
Under the efficient market hypothesis, option‐implied forward variance forms a martingale and changes in forward variance follow a random walk . In this study, we extract forward variance from option prices following a model‐free approach and empirically test the random walk hypothesis. Although results from standard orthogonality tests support the martingale restriction, further results from autoregressive regressions seem to reject the martingale restriction as daily changes in forward variance are found to exhibit negative autocorrelation. However, this anomalous pattern of negative correlation is fully explained by illiquidity effects. Overall, the findings support the random walk hypothesis and informational efficiency of the options market. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:505–535, 2012