Abstract

http://ssrn.com/abstract=224022
 
 

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The Information Content of Implied Volatility, Skewness and Kurtosis: The Empirical Evidence from Long Term CAC 40 Options


Patrick Navatte


Université de Rennes I

Christophe Villa


Audencia Nantes School of Management


European Financial Management, Vol. 6, No. 1, March 2000

Abstract:     
The implied standard deviation is widely believed to be the best available forecast of the volatility of the returns over the remaining contract life (Jorion 1995). In this paper, we generalize this result to the higher moments of the distribution (Skewness and Kurtosis) based on a Gram-Charlier series expansion of the normal distribution (Corrado and Su 1996) using long term CAC 40 option prices contract, named PXL. First, we find that implied first moments contain a substantial amount of information for realized future moments of CAC 40 returns although this amount is decreasing with respect to the moment's order. Second, we find that different shapes of the volatility smile are consistent with different distributions of the underlying returns. Based on these results, we also observe that including other implied moments significantly improve the out-of-sample pricing performance of the Black-Scholes (1973) model.

Keywords: Implied Density Function, Smile, Volatility, Skewness, Kurtosis.

JEL Classification: C14, C52, G12, G13, G14

Accepted Paper Series





Not Available For Download

Date posted: May 16, 2000  

Suggested Citation

Navatte, Patrick and Villa, Christophe, The Information Content of Implied Volatility, Skewness and Kurtosis: The Empirical Evidence from Long Term CAC 40 Options. European Financial Management, Vol. 6, No. 1, March 2000. Available at SSRN: http://ssrn.com/abstract=224022

Contact Information

Patrick Navatte (Contact Author)
Université de Rennes I ( email )
7, Place Hoche
Institut de Gestion de Rennes
35065 Rennes Cedex
France
+33 2 9925 3545 (Phone)
+33 2 9938 8084 (Fax)
Christophe Villa
Audencia Nantes School of Management ( email )
8 route de la Jonelière, BP 31222
Nantes Cedex 3, 44312
France
HOME PAGE: http://www.audencia.com/?id=970
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