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The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market

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  • Thorsten M. Egelkraut
  • Philip Garcia
  • Bruce J. Sherrick

Abstract

Using a flexible method, we develop the term structure of volatility implied by corn futures options with differing maturities, and evaluate its ability to predict subsequent realized price volatility. The implied forward volatilities anticipate realized volatility well. For the nearby interval, the implied forward volatilities provide unbiased forecasts, and are superior to forecasts based on historical volatilities. For more distant intervals, early-year options predict the direction and magnitude of future volatility changes about as well as a three-year moving average and better than a naïve forecast. However, later-year options display less forecast power in part due to reduced trading activity. Copyright 2007, Oxford University Press.

Suggested Citation

  • Thorsten M. Egelkraut & Philip Garcia & Bruce J. Sherrick, 2007. "The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 1-11.
  • Handle: RePEc:oup:ajagec:v:89:y:2007:i:1:p:1-11
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    File URL: http://hdl.handle.net/10.1111/j.1467-8276.2007.00958.x
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    Cited by:

    1. Chad E. Hart & Sergio H. Lence & Dermot J. Hayes & Na Jin, 2016. "Price Mean Reversion, Seasonality, and Options Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(3), pages 707-725.
    2. Chang, Chia-Lin & McAleer, Michael & Wang, Yu-Ann, 2018. "Modelling volatility spillovers for bio-ethanol, sugarcane and corn spot and futures prices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P1), pages 1002-1018.
    3. Chang, Chia-Lin & Huang, Biing-Wen & Chen, Meng-Gu & McAleer, Michael, 2011. "Modelling the asymmetric volatility in hog prices in Taiwan: The impact of joining the WTO," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(7), pages 1491-1506.
    4. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Parametric Bootstrap Tests for Futures Price and Implied Volatility Biases with Application to Rating Livestock Margin Insurance for Dairy Cattle," Staff Papers 135077, University of Minnesota, Department of Applied Economics.
    5. Huang, Biing-Wen & Chen, Meng-Gu & Chang, Chia-Lin & McAleer, Michael, 2009. "Modelling risk in agricultural finance: Application to the poultry industry in Taiwan," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(5), pages 1472-1487.
    6. repec:oup:erevae:v:45:y:2018:i:1:p:121-142. is not listed on IDEAS
    7. Genevre Covindassamy & Michel A. Robe & Jonathan Wallen, 2016. "Sugar With Your Coffee?: Financials, Fundamentals, and Soft Price Uncertainty," IDB Publications (Working Papers) 8588, Inter-American Development Bank.
    8. Egelkraut, Thorsten M. & Garcia, Philip, 2006. "Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(03), December.
    9. Wu, Feng & Myers, Robert J. & Guan, Zhengfei & Wang, Zhiguang, 2015. "Risk-adjusted implied volatility and its performance in forecasting realized volatility in corn futures prices," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 260-274.
    10. Thomsen, Michael R. & McKenzie, Andrew M. & Power, Gabriel J., 2009. "Volatility Surface and Skewness in Live Cattle Futures Price Distributions with Application to North American BSE Announcements," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49354, Agricultural and Applied Economics Association.
    11. Chang, C-L. & Huang, B-W. & Chen, M-G., 2010. "Modelling the Asymmetric Volatility in Hog Prices in Taiwan," Econometric Institute Research Papers EI 2010-46, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.

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