The Forecasting Power of Short-term Options
49 Pages Posted: 15 Jun 2020 Last revised: 31 Mar 2022
Date Written: March 30, 2022
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: Suggested Citation