The Forecasting Power of Short-term Options

50 Pages Posted: 15 Jun 2020

See all articles by Arthur Böök

Arthur Böök

ESADE Business School; Hanken School of Economics

Carlo Sala

ESADE Business School

Date Written: June 8, 2020

Abstract

We propose option-implied measures of conditional asymmetry based upon quantiles and expectiles inferred from weekly options. All quantities are by construction forward looking and estimated non-parametrically through a novel arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles. We find that option implied asymmetry indicators exhibit short, medium and long-term predictive ability for the U.S. equity risk premium and market volatility, 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 Sala, Carlo, The Forecasting Power of Short-term Options (June 8, 2020). 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

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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