The Forecasting Power of Short-term Options

49 Pages Posted: 15 Jun 2020 Last revised: 31 Mar 2022

See all articles by Arthur Böök

Arthur Böök

ESADE Business School; Hanken School of Economics

Juan Felipe Imbet

Université Paris Dauphine - Department of Finance

Martin Reinke

Ludwig Maximilian University of Munich (LMU) - Institute for Finance & Banking

Carlo Sala

ESADE Business School

Date Written: March 30, 2022

Abstract

We propose robust option-implied measures of conditional volatility, skewness and kurtosis based upon quantiles and expectiles inferred from weekly options on the S&P 500.
All quantities are by construction forward-looking and estimated non-parametrically through a novel robust and arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles.
We find that the option-implied robust indicators exhibit short-, medium- and long-term predictive ability for the U.S. equity risk premium, market volatility, skewness and kurtosis, both in- and out-of-sample, and outperform equal indicators inferred from historical returns.

Keywords: Quantiles, Expectiles, Weekly options, Forecasting

JEL Classification: G10, G13, G14, G17

Suggested Citation

Böök, Arthur and Imbet, Juan Felipe and Reinke, Martin and Sala, Carlo, The Forecasting Power of Short-term Options (March 30, 2022). Available at SSRN: https://ssrn.com/abstract=3622433 or http://dx.doi.org/10.2139/ssrn.3622433

Arthur Böök (Contact Author)

ESADE Business School ( email )

Av. de Pedralbes, 60-62
Barcelona, 08034
Spain

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Juan Felipe Imbet

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Martin Reinke

Ludwig Maximilian University of Munich (LMU) - Institute for Finance & Banking ( email )

Ludwigstr. 28
Munich, Bavaria 80539
Germany

Carlo Sala

ESADE Business School ( email )

Avenida de Torreblanca 59
Barcelona, Barcelona 08172
Spain

HOME PAGE: http://www.people.usi.ch/salaca

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