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Options trading driven by volatility directional accuracy

  • K. Maris
  • K. Nikolopoulos
  • K. Giannelos
  • V. Assimakopoulos

Analysts have claimed over the last years that the volatility of an asset is caused solely by the random arrival of new information about the future returns from the underlying asset. It is a common belief that volatility is of great importance in finance and it is one of the critical factors determining option prices and consequently driving option-trading strategies. This article discusses an empirical option trading methodology based on efficient volatility direction forecasts. Although in most cases accurate volatility forecasts are hard to obtain, forecasting the direction is significantly easier. Increase in the directional accuracy leads to profitable investment strategies. The net gain is depended on the size of the changes as well; however successful volatility forecasts in terms of directional accuracy was found to be sufficient for positive results. In order to evaluate the proposed methodology weekly data from CAX40, DAX and the Greek FTSE/ASE 20 stock indices were used.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 39 (2007)
Issue (Month): 2 ()
Pages: 253-260

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Handle: RePEc:taf:applec:v:39:y:2007:i:2:p:253-260
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  1. N'zue Fofana & B. Wade Brorsen, 2001. "GARCH option pricing with implied volatility," Applied Economics Letters, Taylor & Francis Journals, vol. 8(5), pages 335-340.
  2. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
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  8. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  9. K. Maris & G. Pantou & K. Nikolopoulos & E. PagourtzI & V. Assimakopoulos, 2004. "A study of financial volatility forecasting techniques in the FTSE/ASE 20 index," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 453-457.
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