Volatility Indexes seem to point to the Past
AbstractIn theory, by trading options, market participants asses and set future volatilities that can be identified using the Black-Scholes-formula in reverse. In reality, as regression analysis suggests, it is historical market data which instead are used to determine future values. Further analysis shows that historical volatilities are insufficient predictors. Yet this questionable practice is considered by international accounting standards (IAS/IFRS) to allow "historical data and implied volatilities" for "reasonable estimations". In a kind of short-circuit, historical volatilities are introduced into option trading and returned as implied volatilities. In reality, both differ significantly from future values. Comparing the volatility of the past nine weeks with that of the following nine weeks, estimation error ranges from four to over ten percentage points. (No paper found in the net challenging the implied hypothesis of IAS 39/AG82(f))
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 18025.
Date of creation: 20 Oct 2009
Date of revision:
Volatility; Prediction; EU Accounting Standards; IAS; Correlation; GARCH; Derivatives;
Find related papers by JEL classification:
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
- H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.