IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v49y2014i03p663-697_00.html

The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation

Author

Listed:
  • Christoffersen, Peter
  • Feunou, Bruno
  • Jacobs, Kris
  • Meddahi, Nour

Abstract

Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so, we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas, and we assess the option valuation properties using Standard & Poor’s (S&P) 500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity, and volatility levels.

Suggested Citation

  • Christoffersen, Peter & Feunou, Bruno & Jacobs, Kris & Meddahi, Nour, 2014. "The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(3), pages 663-697, June.
    • Handle: RePEc:cup:jfinqa:v:49:y:2014:i:03:p:663-697_00
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109014000428/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:49:y:2014:i:03:p:663-697_00. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.