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The forecasting performance of implied volatility from live cattle options contracts: Implications for agribusiness risk management

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  • Mark R. Manfredo

    (Morrison School of Agribusiness and Resource Management, Arizona State University, East 7001 E. Williams Field Rd., Wanner Hall, Mesa, AZ 85212. E-mail: manfredo@asu.edu)

  • Dwight R. Sanders

    (Department of Agribusiness Economics, Southern Illinois University, Mail code 4410, Carbondale, IL 62901-4410. E-mail: dwights@siu.edu)

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    Abstract

    This research examines the forecasting performance of implied volatility derived from nearby live cattle options contracts in predicting 1-week volatility of nearby live cattle futures prices. Forecast evaluation is conducted from the perspective of an agribusiness risk manager. The methodology employed avoids overlapping forecast horizons and focuses on forecast errors, minimizing interpretive issues. Results suggest that implied volatility is a biased and inefficient forecast of 1-week nearby live cattle futures price volatility. However, implied volatility encompasses all information provided by a time series alternative, and it has improved as a forecast over time. These findings provide insight to agribusiness risk managers on how to adjust for bias and inefficiency of implied volatility, and provide insight into their information content. [JEL|EconLit citations: Q130, Q140, G130.] © 2004 Wiley Periodicals, Inc. Agribusiness 20: 217-230, 2004.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Agribusiness.

    Volume (Year): 20 (2004)
    Issue (Month): 2 ()
    Pages: 217-230

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    Handle: RePEc:wly:agribz:v:20:y:2004:i:2:p:217-230

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    Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1520-6297

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    1. Hayenga, Marvin L. & Jiang, Bingrong & Lence, Sergio H., 1996. "Improving Wholesale Beef and Pork Product Cross Hedging," Staff General Research Papers, Iowa State University, Department of Economics 5004, Iowa State University, Department of Economics.
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    3. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 50(2), pages 125-150, November.
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    7. William D. Nordhaus, 1985. "Forecasting Efficiency: Concepts and Applications," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 774, Cowles Foundation for Research in Economics, Yale University.
    8. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, Elsevier, vol. 13(2), pages 281-291, June.
    9. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 507-28, June.
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