Term Structure Forecasts of Volatility and Option Portfolio Returns

41 Pages Posted: 9 Sep 2018

See all articles by Jim Campasano

Jim Campasano

Kansas State University - Department of Finance

Date Written: August 28, 2018

Abstract

I examine the predictability of equity implied volatility from the term structure, and find that forward volatility levels are biased predictors of future spot implied volatility. I construct options structures which proxy for forward volatility assets, and show that a long-short portfolio of forward volatility assets produce significantly profitable returns. As the construction of the trade is borne from a violation of an expectations hypothesis, the strategy is similar to the carry trade effected in foreign exchange and other assets. Unlike the returns to carry in foreign exchange and other assets, the forward volatility assets are not exposed to liquidity or volatility risks and negatively loads on market risk.

Suggested Citation

Campasano, Jim, Term Structure Forecasts of Volatility and Option Portfolio Returns (August 28, 2018). Available at SSRN: https://ssrn.com/abstract=3240028 or http://dx.doi.org/10.2139/ssrn.3240028

Jim Campasano (Contact Author)

Kansas State University - Department of Finance ( email )

Manhattan, KS 66506
United States

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