Predictive Accuracy of Futures Options Implied Volatility: The Case of the Exchange Rate Futures Mexican Peso-U.S. Dollar

47 Pages Posted: 10 Oct 2004 Last revised: 17 Jul 2008

See all articles by Guillermo Benavides

Guillermo Benavides

Banco de Mexico; Universidad del Valle de Mexico

Date Written: August 2004

Abstract

There has been substantial research effort aimed to forecast futures price return volatilities of financial assets. A significant part of the literature shows that volatility forecast accuracy is not easy to estimate regardless of the forecasting model applied. This paper examines the volatility accuracy of several volatility forecast models for the case of the Mexican peso-USD exchange rate futures returns. The models applied here are a univariate GARCH, a multivariate ARCH (the BEKK model), two option implied volatility models and a composite forecast model. The composite model includes time-series (historical) and option implied volatility forecasts. Different to other works in the literature, in this paper there is a more rigorous analysis of the option implied volatilities calculations. While most of the papers in the literature present only one option implied volatility model or estimates from it in this paper there are two option pricing models presented: one for pricing European options and the other one an approximation to price American options. The results show that the option implied models are superior to the historical models in terms of accuracy and that the composite forecast model was the most accurate one (compared to the alternative models) having the lowest mean-square-errors. According to these findings it is recommended to use a composite forecast model if both types of data are available i.e. the time-series (historical) and the option implied.

Keywords: Composite forecast models, exchange rates, multivariate GARCH, option implied volatility, volatility forecasting

JEL Classification: C22, C52, C53, G10

Suggested Citation

Benavides, Guillermo, Predictive Accuracy of Futures Options Implied Volatility: The Case of the Exchange Rate Futures Mexican Peso-U.S. Dollar (August 2004). Available at SSRN: https://ssrn.com/abstract=600742 or http://dx.doi.org/10.2139/ssrn.600742

Guillermo Benavides (Contact Author)

Banco de Mexico ( email )

Cinco de Mayo # 2
Mexico DF, 06059
Mexico

Universidad del Valle de Mexico ( email )

Calzada de Tlalpan No. 3058. Santa Ursula Coapa
Distrito Federal, 29000
Mexico

HOME PAGE: http://ssrn.com/author=386155

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