Chernov, Mikhail (2007) On the role of risk premia in volatility forecasting. Journal of Business and Economic Statistics, 25 (4). pp. 411-426. ISSN 0735-0015
Full text not available from this repository.Abstract
I explain why at-the-money implied volatility is a biased and inefficient forecast of future realized volatility using the insights from the empirical option-pricing literature. First, I explain how the risk premia, which manifest themselves through disparity between objective and risk-neutral probability measures, lead to the disparity between realized and implied volatilities. Second, I show that this disparity is a function of the latent spot volatility, which I estimate using the historical volatility and high–low range. An empirical exercise that is based on at-the-money implied volatility series of foreign currencies and stock market indexes, is supportive of my risk premia-based explanation of the bias.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.amstat.org/publications/jbes.cfm |
| Additional Information: | © 2007 American Statistical Association |
| Divisions: | Finance |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
| JEL classification: | E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation |
| Date Deposited: | 10 Nov 2011 10:08 |
| Last Modified: | 11 Dec 2024 23:13 |
| URI: | http://eprints.lse.ac.uk/id/eprint/39393 |
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