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Recovering Implied Volatility

Author

Listed:
  • Ohad Kadan

    (W. P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Fang Liu

    (Cornerstone Research, New York, New York 10022)

  • Xiaoxiao Tang

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080)

Abstract

We propose a methodology for estimating option-implied, forward-looking variances and covariances of assets and portfolios, which may not possess actively traded options. Our approach relies on the observation that, if asset returns follow a factor structure, then the variances and covariances of the factors span the systematic variances and covariances of assets. We implement the methodology empirically and show that our forward-looking moment estimates provide useful implications for the prediction of jumps and for portfolio choice.

Suggested Citation

  • Ohad Kadan & Fang Liu & Xiaoxiao Tang, 2024. "Recovering Implied Volatility," Management Science, INFORMS, vol. 70(1), pages 255-282, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:255-282
    DOI: 10.1287/mnsc.2022.4653
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