The Forecasting Efficacy of Risk-Neutral Moments for Crude Oil Volatility

Chatrath, A., Miao, H., Ramchander, S., & Wang, T. (2015). The Forecasting Efficacy of Risk‐Neutral Moments for Crude Oil Volatility. Journal of Forecasting, 34(3), 177-190.

Posted: 20 Apr 2015

See all articles by Arjun Chatrath

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration

Hong Miao

Colorado State University, Fort Collins - Department of Finance & Real Estate

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate

Tianyang Wang

Colorado State University - Department of Finance & Real Estate

Date Written: April 18, 2015

Abstract

This paper examines the information content of implied volatility for crude oil options as it relates to future realized volatility. Using data for the period 1996 to 2011 we find that implied volatility is an effective predictor of the month-ahead realized volatility. We show that implied volatility subsumes the information content of contemporaneous volatility, and it contains incremental information on future volatility after controlling for contemporaneous volatility. Furthermore, incorporating risk-neutral skewness, and especially kurtosis, improves the forecasting of realized volatility. Overall, the association between implied volatility and month-ahead realized volatility is consistent with evidence documented for other asset classes, leading us to conclude that implied volatility serves as a reasonable proxy for expected volatility.

Keywords: risk-neutral moments; crude oil futures options; implied volatility

JEL Classification: G13

Suggested Citation

Chatrath, Arjun and Miao, Hong and Ramchander, Sanjay and Wang, Tianyang, The Forecasting Efficacy of Risk-Neutral Moments for Crude Oil Volatility (April 18, 2015). Chatrath, A., Miao, H., Ramchander, S., & Wang, T. (2015). The Forecasting Efficacy of Risk‐Neutral Moments for Crude Oil Volatility. Journal of Forecasting, 34(3), 177-190.. Available at SSRN: https://ssrn.com/abstract=2596087

Arjun Chatrath

University of Portland - Dr. Robert B. Pamplin, Jr. School of Business Administration ( email )

Portland, OR 97203
United States
503-283-7465 (Phone)

Hong Miao

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States
970-491-6681 (Phone)

Tianyang Wang (Contact Author)

Colorado State University - Department of Finance & Real Estate ( email )

Finance and Real Estate Department
1272 Campus Delivery
Fort Collins, CO 80523
United States

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