Forecasting with Option-Implied Information

Handbook of Economic Forecasting, Volume 2, G. Elliott and A. Timmermann (eds.)

72 Pages Posted: 8 Dec 2011 Last revised: 11 Jul 2012

Peter Christoffersen

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

Kris Jacobs

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

Bo Young Chang

Bank of Canada

Date Written: July 10, 2012

Abstract

This chapter surveys the methods available for extracting information from option prices that can be used in forecasting. We consider option-implied volatilities, skewness, kurtosis, and densities. More generally, we discuss how any forecasting object which is a twice differentiable function of the future realization of the underlying risky asset price can utilize option-implied information in a well-defined manner. Going beyond the univariate option-implied density, we also consider results on option-implied covariance, correlation and beta forecasting, as well as the use of option-implied information in cross-sectional forecasting of equity returns. We discuss how option-implied information can be adjusted for risk premia to remove biases in forecasting regressions.

Keywords: Volatility, skewness, kurtosis, density forecasting, risk-neutral

JEL Classification: G13, G17, C53

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Chang, Bo Young, Forecasting with Option-Implied Information (July 10, 2012). Handbook of Economic Forecasting, Volume 2, G. Elliott and A. Timmermann (eds.). Available at SSRN: https://ssrn.com/abstract=1969863 or http://dx.doi.org/10.2139/ssrn.1969863

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

Kris Jacobs

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

Houston, TX 77204-6021
United States

Bo Young Chang

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A0G9
Canada
613-782-8936 (Phone)
613-782-7136 (Fax)

HOME PAGE: http://www.bankofcanada.ca/author/bo-young-chang-2/

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