Implied Volatility from Options on Gold Futures: Do Statistical Forecasts Add Value or Simply Paint the Lilly?
Christopher J. Neely
Federal Reserve Bank of St. Louis - Research Division
June 2, 2004
EFMA 2004 Basel Meetings Paper; FRB of St. Louis Working Paper No. 2003-018C
Consistent with findings in other markets, implied volatility is a biased predictor of the realized volatility of gold futures. No existing explanation - including a price of volatility risk - can completely explain the bias, but much of this apparent bias can be explained by persistence and estimation error in implied volatility. Statistical criteria reject the hypothesis that implied volatility is informationally efficient with respect to econometric forecasts. But delta hedging exercises indicate that such econometric forecasts have no incremental economic value. Thus, statistical measures of bias and information efficiency are misleading measures of the information content of option prices.
Number of Pages in PDF File: 55
Keywords: gold, futures, option, implied volatility, GARCH, long-memory, ARIMA, high frequency
JEL Classification: F31, G15working papers series
Date posted: May 7, 2004
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