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Implied volatility from options on gold futures: do statistical forecasts add value or simply paint the lilly?

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  • Christopher J. Neely

Abstract

Consistent with findings in other markets, implied volatility is a biased predictor of the realized volatility of gold futures. No existing explanation—including a price of volatility risk—can completely explain the bias, but much of this apparent bias can be explained by persistence and estimation error in implied volatility. Statistical criteria reject the hypothesis that implied volatility is informationally efficient with respect to econometric forecasts. But delta hedging exercises indicate that such econometric forecasts have no incremental economic value. Thus, statistical measures of bias and information efficiency are misleading measures of the information content of option prices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-018.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2003-018

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Keywords: Gold ; Futures ; Forecasting;

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References

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Cited by:
  1. Christopher J. Neely & Drew B. Winters, 2005. "Year-end seasonality in one-month LIBOR derivatives," Working Papers 2003-040, Federal Reserve Bank of St. Louis.

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