Download or read book The Importance of the Volatility Risk Premium for Volatility Forecasting written by Marcel Prokopczuk and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.
Download or read book A Practical Guide to Forecasting Financial Market Volatility written by Ser-Huang Poon and published by John Wiley & Sons. This book was released on 2005-08-19 with total page 236 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial market volatility forecasting is one of today's most important areas of expertise for professionals and academics in investment, option pricing, and financial market regulation. While many books address financial market modelling, no single book is devoted primarily to the exploration of volatility forecasting and the practical use of forecasting models. A Practical Guide to Forecasting Financial Market Volatility provides practical guidance on this vital topic through an in-depth examination of a range of popular forecasting models. Details are provided on proven techniques for building volatility models, with guide-lines for actually using them in forecasting applications.
Download or read book Predicting the VIX and the Volatility Risk Premium written by Elena Andreou and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Forecast Performance of Implied Volatility and the Impact of the Volatility Risk Premium written by Ralf Becker and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Volatility as an Asset Class written by Ryszard Kokoszczynski and published by Peter Lang Gmbh, Internationaler Verlag Der Wissenschaften. This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volatility derivatives are today an important group of financial instruments. This book presents an overview of their major classes and their possible applications in investment strategies and portfolio optimization. Volatility is not constant so the book presents its term structure and its potential use in forecasting volatility.
Download or read book Learning and Forecasts about Option Returns Through the Volatility Risk Premium written by Alejandro Bernales and published by . This book was released on 2019 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use learning in an equilibrium model to explain the puzzling predictive power of the volatility risk premium (VRP) for option returns. In the model, a representative agent follows a rational Bayesian learning process in an economy under incomplete information with the objective of pricing options. We show that learning induces dynamic differences between probability measures P and Q, which produces predictability patterns from the VRP for option returns. The forecasting features of the VRP for option returns, obtained through our model, exhibit the same behaviour as those observed in an empirical analysis with S&P 500 index options.
Download or read book Construction and Interpretation of Model free Implied Volatility written by Torben G. Andersen and published by . This book was released on 2007 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: The notion of model-free implied volatility (MFIV), constituting the basis for the highly publicized VIX volatility index, can be hard to measure with accuracy due to the lack of precise prices for options with strikes in the tails of the return distribution. This is reflected in practice as the VIX index is computed through a tail-truncation which renders it more compatible with the related concept of corridor implied volatility (CIV). We provide a comprehensive derivation of the CIV measure and relate it to MFIV under general assumptions. In addition, we price the various volatility contracts, and hence estimate the corresponding volatility measures, under the standard Black-Scholes model. Finally, we undertake the first empirical exploration of the CIV measures in the literature. Our results indicate that the measure can help us refine and systematize the information embedded in the derivatives markets. As such, the CIV measure may serve as a tool to facilitate empirical analysis of both volatility forecasting and volatility risk pricing across distinct future states of the world for diverse asset categories and time horizons.
Download or read book Predicting the VIX and Volatility Risk Premium written by Elena Andreou and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents an innovative approach to extracting factors which are shown to predict the VIX, the S&P 500 Realized Volatility and the Variance Risk Premium. The approach is innovative along two different dimensions, namely: (1) we extract factors from panels of filtered volatilities -- in particular large panels of univariate financial asset ARCH-type models and (2) we price equity volatility risk using factors which go beyond the equity class. These are volatility factors extracted from panels of volatilities of short-term funding and long-run corporate spreads as well as volatilities of energy and metals commodities returns and sport/future spreads.
Download or read book Implied Volatilities as Forecasts of Future Volatility Time Varying Risk Premia and Returns Variability written by Mikhail Chernov and published by . This book was released on 2002 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The unbiasedness tests of implied volatility as a forecast of future realized volatility have found implied volatility to be a biased predictor. We explain this puzzle by recognizing that option prices contain a market risk premium not only on the asset itself, but also on its volatility. Hull and White (1987) show using a stochastic volatility model that a call option price can be represented as an expected value of the Black-Scholes formula evaluated at the average integrated volatility. If we allow volatility risk to be priced, this expectation should be taken under the risk-neutral probability measure, and can be decomposed into the expectation with respect to the physical measure and the risk-premium term. This term is just a linear function of the unobservable spot volatility. The decomposition explains the bias documented in the empirical literature and shows that the realized and historical volatility, which are used in the tests, are in fact the estimates of the unobserved quadratic variation and spot volatility of the stock-return generating process. Therefore, the use of these estimates generates the error-in-the-variables problem. We generalize the above results from a stochastic volatility model to a model with multiple volatility and jump factors. We provide an empirical illustration based on two US equity indices and three foreign currency rates. We find, that when we take into an account the risk-premium and use efficient methods to estimate volatility, the unbiasedness hypothesis can not be rejected, and the point estimate of the loading on the implied volatility in the traditional regression is equal to 1.
Download or read book Forecasting Volatility in the Financial Markets written by Stephen Satchell and published by Elsevier. This book was released on 2011-02-24 with total page 428 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasting Volatility in the Financial Markets, Third Edition assumes that the reader has a firm grounding in the key principles and methods of understanding volatility measurement and builds on that knowledge to detail cutting-edge modelling and forecasting techniques. It provides a survey of ways to measure risk and define the different models of volatility and return. Editors John Knight and Stephen Satchell have brought together an impressive array of contributors who present research from their area of specialization related to volatility forecasting. Readers with an understanding of volatility measures and risk management strategies will benefit from this collection of up-to-date chapters on the latest techniques in forecasting volatility. Chapters new to this third edition:* What good is a volatility model? Engle and Patton* Applications for portfolio variety Dan diBartolomeo* A comparison of the properties of realized variance for the FTSE 100 and FTSE 250 equity indices Rob Cornish* Volatility modeling and forecasting in finance Xiao and Aydemir* An investigation of the relative performance of GARCH models versus simple rules in forecasting volatility Thomas A. Silvey - Leading thinkers present newest research on volatility forecasting - International authors cover a broad array of subjects related to volatility forecasting - Assumes basic knowledge of volatility, financial mathematics, and modelling
Download or read book Volatility and Correlation written by Riccardo Rebonato and published by John Wiley & Sons. This book was released on 2005-07-08 with total page 864 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Volatility and Correlation 2nd edition: The Perfect Hedger and the Fox, Rebonato looks at derivatives pricing from the angle of volatility and correlation. With both practical and theoretical applications, this is a thorough update of the highly successful Volatility & Correlation – with over 80% new or fully reworked material and is a must have both for practitioners and for students. The new and updated material includes a critical examination of the ‘perfect-replication’ approach to derivatives pricing, with special attention given to exotic options; a thorough analysis of the role of quadratic variation in derivatives pricing and hedging; a discussion of the informational efficiency of markets in commonly-used calibration and hedging practices. Treatment of new models including Variance Gamma, displaced diffusion, stochastic volatility for interest-rate smiles and equity/FX options. The book is split into four parts. Part I deals with a Black world without smiles, sets out the author’s ‘philosophical’ approach and covers deterministic volatility. Part II looks at smiles in equity and FX worlds. It begins with a review of relevant empirical information about smiles, and provides coverage of local-stochastic-volatility, general-stochastic-volatility, jump-diffusion and Variance-Gamma processes. Part II concludes with an important chapter that discusses if and to what extent one can dispense with an explicit specification of a model, and can directly prescribe the dynamics of the smile surface. Part III focusses on interest rates when the volatility is deterministic. Part IV extends this setting in order to account for smiles in a financially motivated and computationally tractable manner. In this final part the author deals with CEV processes, with diffusive stochastic volatility and with Markov-chain processes. Praise for the First Edition: “In this book, Dr Rebonato brings his penetrating eye to bear on option pricing and hedging.... The book is a must-read for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.” —Professor Ian Cooper, London Business School “Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion...A rare combination of intellectual insight and practical common sense.” —Anthony Neuberger, London Business School
Download or read book Risk Premium Effects on Implied Volatility Regressions written by Leonidas Rompolis and published by . This book was released on 2009 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides new insights into the sources of bias of option implied volatility to forecast its physical counterpart. It argues that this bias can be attributed to volatility risk premium effects. The latter are found to depend on high order cumulants of the risk neutral density. These cumulants capture the risk averse behavior of investors in the stock and option markets for bearing the investment risk which is reflected in the deviations of the implied risk neutral distribution from the normal distribution. The paper shows that the bias of the implied volatility to forecast its corresponding physical measure can be eliminated when the implied volatility regressions are adjusted for the risk premium effects. The latter are captured mainly by the third order risk neutral cumulant. The paper also shows that a substantial reduction of higher order risk neutral cumulants biases to predict their corresponding physical ones is supported when adjustments for risk premium effects are made.
Download or read book Forecasting Volatility written by Stephen Figlewski and published by . This book was released on 1997 with total page 98 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option implied and Realized Volatilities written by Tim Bollerslev and published by . This book was released on 2004 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns"--Abstract.
Download or read book Jump and Volatility Risk and Risk Premia written by Pedro Santa-Clara and published by . This book was released on 2004 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.
Download or read book Volatility Risk Premium in FX Market written by and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I derive the volatility risk premium in FX market from a consumption based model. High volatility corresponds to low consumption growth of professional FX market participants, so they are ready to pay a premium for holding assets correlated with volatility shocks. This premium is not decreased to zero by households, because they can only participate in FX market through asset managers. Asset managers optimize their utility from performance-based compensation. This makes them behave as if they are owners of the funds deriving all their income from investment activities and they require a compensation for the risks that they take. The size of risk premium is determined by the asset manager's risk aversion and their compensation structure. I test the model prediction that the volatility risk premium is different in FX and stock market and find that the difference in estimates is highly statistically significant.
Download or read book Portfolio Risk Analysis written by Gregory Connor and published by Princeton University Press. This book was released on 2010-03-15 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio risk forecasting has been and continues to be an active research field for both academics and practitioners. Almost all institutional investment management firms use quantitative models for their portfolio forecasting, and researchers have explored models' econometric foundations, relative performance, and implications for capital market behavior and asset pricing equilibrium. Portfolio Risk Analysis provides an insightful and thorough overview of financial risk modeling, with an emphasis on practical applications, empirical reality, and historical perspective. Beginning with mean-variance analysis and the capital asset pricing model, the authors give a comprehensive and detailed account of factor models, which are the key to successful risk analysis in every economic climate. Topics range from the relative merits of fundamental, statistical, and macroeconomic models, to GARCH and other time series models, to the properties of the VIX volatility index. The book covers both mainstream and alternative asset classes, and includes in-depth treatments of model integration and evaluation. Credit and liquidity risk and the uncertainty of extreme events are examined in an intuitive and rigorous way. An extensive literature review accompanies each topic. The authors complement basic modeling techniques with references to applications, empirical studies, and advanced mathematical texts. This book is essential for financial practitioners, researchers, scholars, and students who want to understand the nature of financial markets or work toward improving them.
