Implied Volatility from Options on Gold Futures: Do Statistical Forecasts Add Value or Simply Paint the Lilly?

55 Pages Posted: 7 May 2004

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Date Written: June 2, 2004

Abstract

Consistent with findings in other markets, implied volatility is a biased predictor of the realized volatility of gold futures. No existing explanation - including a price of volatility risk - can completely explain the bias, but much of this apparent bias can be explained by persistence and estimation error in implied volatility. Statistical criteria reject the hypothesis that implied volatility is informationally efficient with respect to econometric forecasts. But delta hedging exercises indicate that such econometric forecasts have no incremental economic value. Thus, statistical measures of bias and information efficiency are misleading measures of the information content of option prices.

Keywords: gold, futures, option, implied volatility, GARCH, long-memory, ARIMA, high frequency

JEL Classification: F31, G15

Suggested Citation

Neely, Christopher J., Implied Volatility from Options on Gold Futures: Do Statistical Forecasts Add Value or Simply Paint the Lilly? (June 2, 2004). Available at SSRN: https://ssrn.com/abstract=485402 or http://dx.doi.org/10.2139/ssrn.485402

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

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