Volatility Forecasts Embedded in the Prices of Crude-Oil Options

47 Pages Posted: 1 Jun 2020

See all articles by Dudley Gilder

Dudley Gilder

Nottingham University Business School

Leonidas Tsiaras

Aston University - Aston Business School

Date Written: January 1, 2020

Abstract

This paper evaluates and compares the ability of alternative option-implied volatility measures to forecast the monthly realized volatility of crude-oil returns. We find that a corridor implied volatility measure that aggregates information from a narrow range of option contracts consistently outperforms forecasts obtained by the popular Black-Scholes and model-free volatility expectations, as well as those generated by a high-frequency realized volatility model. In particular, this measure ranks favorably in all regression-based tests, delivers the lowest forecast errors under either symmetric or asymmetric loss functions, and generates economically significant gains in volatility timing exercises. Our results also show that the CBOE's "oil-VIX" (OVX) index performs poorly, as it routinely produces the least accurate forecasts.

Keywords: Volatility forecasting, option-implied volatility, realized variance

JEL Classification: C53, C58, G17

Suggested Citation

Gilder, Dudley and Tsiaras, Leonidas, Volatility Forecasts Embedded in the Prices of Crude-Oil Options (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=3590281 or http://dx.doi.org/10.2139/ssrn.3590281

Dudley Gilder

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Leonidas Tsiaras (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

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