Recovering Implied Volatility

51 Pages Posted: 17 May 2017 Last revised: 14 Oct 2019

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Fang Liu

Cornell University

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: October 1, 2019

Abstract

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.

Suggested Citation

Kadan, Ohad and Liu, Fang and Tang, Xiaoxiao, Recovering Implied Volatility (October 1, 2019). 29th Annual Conference on Financial Economics & Accounting 2018, Available at SSRN: https://ssrn.com/abstract=2969089 or http://dx.doi.org/10.2139/ssrn.2969089

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fang Liu (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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