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Investigating the information content of the model-free volatility expectation by Monte Carlo methods

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Investigating the information content of the model-free volatility expectation by Monte Carlo methods. / Zhang, Yuanyuan; Taylor, S. J.; Wang, Lili.

In: Journal of Futures Markets, Vol. 33, No. 11, 11.2013, p. 1071-1095.

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Zhang, Yuanyuan ; Taylor, S. J. ; Wang, Lili. / Investigating the information content of the model-free volatility expectation by Monte Carlo methods. In: Journal of Futures Markets. 2013 ; Vol. 33, No. 11. pp. 1071-1095.

Bibtex

@article{af5498a2952549e4bdb2a4c57a7a6c44,
title = "Investigating the information content of the model-free volatility expectation by Monte Carlo methods",
abstract = "We explore the impact of both the number of option prices and the measurement errors in option prices upon the information content of the model-free volatility expectation, and compare it with the Black–Scholes at-the-money (ATM) implied volatility. We simulate the realized volatility process and option prices using Heston's price dynamics and option valuation formula. The results show that the model-free volatility expectation always contains important information about future realized volatilities. When the option prices contain random measurement noise, the informational efficiency of the model-free volatility expectation increases monotonically with the number of out-of-the-money options. The model-free volatility expectation outperforms the ATM implied volatility, except when there are only a few option price observations. For the traded strikes for S&P 500 index options, we further show that fitting implied volatility curves before applying the current CBOE procedure for constructing the VIX index can improve the VIX's efficiency when forecasting future realized volatilities.",
author = "Yuanyuan Zhang and Taylor, {S. J.} and Lili Wang",
year = "2013",
month = "11",
doi = "10.1002/fut.21570",
language = "English",
volume = "33",
pages = "1071--1095",
journal = "Journal of Futures Markets",
issn = "0270-7314",
publisher = "Wiley-Liss Inc.",
number = "11",

}

RIS

TY - JOUR

T1 - Investigating the information content of the model-free volatility expectation by Monte Carlo methods

AU - Zhang, Yuanyuan

AU - Taylor, S. J.

AU - Wang, Lili

PY - 2013/11

Y1 - 2013/11

N2 - We explore the impact of both the number of option prices and the measurement errors in option prices upon the information content of the model-free volatility expectation, and compare it with the Black–Scholes at-the-money (ATM) implied volatility. We simulate the realized volatility process and option prices using Heston's price dynamics and option valuation formula. The results show that the model-free volatility expectation always contains important information about future realized volatilities. When the option prices contain random measurement noise, the informational efficiency of the model-free volatility expectation increases monotonically with the number of out-of-the-money options. The model-free volatility expectation outperforms the ATM implied volatility, except when there are only a few option price observations. For the traded strikes for S&P 500 index options, we further show that fitting implied volatility curves before applying the current CBOE procedure for constructing the VIX index can improve the VIX's efficiency when forecasting future realized volatilities.

AB - We explore the impact of both the number of option prices and the measurement errors in option prices upon the information content of the model-free volatility expectation, and compare it with the Black–Scholes at-the-money (ATM) implied volatility. We simulate the realized volatility process and option prices using Heston's price dynamics and option valuation formula. The results show that the model-free volatility expectation always contains important information about future realized volatilities. When the option prices contain random measurement noise, the informational efficiency of the model-free volatility expectation increases monotonically with the number of out-of-the-money options. The model-free volatility expectation outperforms the ATM implied volatility, except when there are only a few option price observations. For the traded strikes for S&P 500 index options, we further show that fitting implied volatility curves before applying the current CBOE procedure for constructing the VIX index can improve the VIX's efficiency when forecasting future realized volatilities.

U2 - 10.1002/fut.21570

DO - 10.1002/fut.21570

M3 - Journal article

VL - 33

SP - 1071

EP - 1095

JO - Journal of Futures Markets

JF - Journal of Futures Markets

SN - 0270-7314

IS - 11

ER -