Forecasting Future Volatility from Option Prices

75 Pages Posted: 31 Dec 2000

See all articles by Allen M. Poteshman

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: December 6, 2000

Abstract

Evidence exists that option prices produce biased forecasts of future volatility across a wide variety of options markets. This paper presents two main results. First, approximately half of the forecasting bias in the S&P 500 index (SPX) options market is eliminated by constructing measures of realized volatility from five minute observations on SPX futures rather than from daily closing SPX levels. Second, much of the remaining forecasting bias is eliminated by employing an option pricing model that permits a non-zero market price of volatility risk.

Suggested Citation

Poteshman, Allen M., Forecasting Future Volatility from Option Prices (December 6, 2000). AFA 2001 New Orleans. Available at SSRN: https://ssrn.com/abstract=243151 or http://dx.doi.org/10.2139/ssrn.243151

Allen M. Poteshman (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

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