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Some Evidence on Option Prices as Predictors of Volatility

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  • Edey, Malcolm
  • Elliott, Graham

Abstract

This paper investigates the efficiency of Australian options market using a version of the Black-Scholes model. Under the joint null hypothesis that the pricing model is valid, and that forecasts are efficient, the implied volatilities calculated from observed.option prices should be efficient predictors of squared changes in the prices of the underlying securities on which the options are written. This hypothesis is tested using weekly data on prices of Australian financial futures options, and over-the-counter options in the Australian dollar/U.S. dollar currency market. The results indicate significant forecasting biases for each of the contracts studied. In each case, movements in implied volatilities appear to overstate changes in the true volatility of underlying prices. Copyright 1992 by Blackwell Publishing Ltd

Suggested Citation

  • Edey, Malcolm & Elliott, Graham, 1992. "Some Evidence on Option Prices as Predictors of Volatility," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(4), pages 567-578, November.
    • Handle: RePEc:bla:obuest:v:54:y:1992:i:4:p:567-78
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    Cited by:

    1. Owain Ap Gwilym & Mike Buckle, 1999. "Volatility forecasting in the framework of the option expiry cycle," The European Journal of Finance, Taylor & Francis Journals, vol. 5(1), pages 73-94.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Vipul Kumar Singh, 2013. "Effectiveness of volatility models in option pricing: evidence from recent financial upheavals," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 10(3), pages 352-375, October.

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