The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation

51 Pages Posted: 18 Mar 2010 Last revised: 8 Dec 2012

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Bruno Feunou

Bank of Canada

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Nour Meddahi

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: December 6, 2012

Abstract

Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas and we assess the option valuation properties using S&P500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity and volatility levels.

Keywords: Realized volatility, index options, risk premium, heteroskedasticity

JEL Classification: G12, G13

Suggested Citation

Christoffersen, Peter and Feunou, Bruno and Jacobs, Kris and Meddahi, Nour, The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation (December 6, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1572756 or http://dx.doi.org/10.2139/ssrn.1572756

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Bruno Feunou

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8302 (Phone)

HOME PAGE: http://kamkui.net/

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Nour Meddahi

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

HOME PAGE: http://gremaq.univ-tlse1.fr/perso/meddahi/

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