Improving the Predictability of Real Economic Activity and Asset Returns with Forward Variances Inferred from Option Portfolios

47 Pages Posted: 8 Jun 2010 Last revised: 29 Feb 2012

See all articles by Gurdip Bakshi

Gurdip Bakshi

Temple University - Fox School of Business and Management; Fox School of Business

George Panayotov

Hong Kong University of Science & Technology (HKUST)

Georgios Skoulakis

University of British Columbia (UBC) - Division of Finance

Date Written: June 8, 2010

Abstract

This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and (iv) changes in variance swap rates. Our yardstick for measuring predictive ability is both individual and joint parameter statistical significance within a market, as well as across a set of markets.

Keywords: Predictability, traded market variance, real economic activity, Treasury returns, stock market

JEL Classification: G10, G11, G12, G13, C5, D24, D34

Suggested Citation

Bakshi, Gurdip S. and Panayotov, George and Skoulakis, Georgios, Improving the Predictability of Real Economic Activity and Asset Returns with Forward Variances Inferred from Option Portfolios (June 8, 2010). Robert H. Smith School Research Paper No. RHS 06-137, Available at SSRN: https://ssrn.com/abstract=1622088 or http://dx.doi.org/10.2139/ssrn.1622088

Gurdip S. Bakshi (Contact Author)

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

George Panayotov

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong
852-2358-5049 (Phone)
852-2358-1749 (Fax)

Georgios Skoulakis

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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