Recovering Implied Volatility
51 Pages Posted: 17 May 2017 Last revised: 14 Oct 2019
Date Written: October 1, 2019
We propose a methodology for estimating option-implied forward-looking variances and covariances of assets and portfolios, which may not possess actively-traded options. Our approach relies on the observation that any factor structure for stock returns naturally induces a factor structure for return volatility. We implement the methodology empirically and show that our forward-looking moment estimates provide useful implications for the prediction of jumps and for portfolio choice.
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