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The forecasting performance of implied volatility from live cattle options contracts: Implications for agribusiness risk management

  • Mark R. Manfredo

    (Morrison School of Agribusiness and Resource Management, Arizona State University, East 7001 E. Williams Field Rd., Wanner Hall, Mesa, AZ 85212. E-mail: manfredo@asu.edu)

  • Dwight R. Sanders

    (Department of Agribusiness Economics, Southern Illinois University, Mail code 4410, Carbondale, IL 62901-4410. E-mail: dwights@siu.edu)

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    This research examines the forecasting performance of implied volatility derived from nearby live cattle options contracts in predicting 1-week volatility of nearby live cattle futures prices. Forecast evaluation is conducted from the perspective of an agribusiness risk manager. The methodology employed avoids overlapping forecast horizons and focuses on forecast errors, minimizing interpretive issues. Results suggest that implied volatility is a biased and inefficient forecast of 1-week nearby live cattle futures price volatility. However, implied volatility encompasses all information provided by a time series alternative, and it has improved as a forecast over time. These findings provide insight to agribusiness risk managers on how to adjust for bias and inefficiency of implied volatility, and provide insight into their information content. [JEL|EconLit citations: Q130, Q140, G130.] © 2004 Wiley Periodicals, Inc. Agribusiness 20: 217-230, 2004.

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    File URL: http://hdl.handle.net/10.1002/agr.20003
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    Article provided by John Wiley & Sons, Ltd. in its journal Agribusiness.

    Volume (Year): 20 (2004)
    Issue (Month): 2 ()
    Pages: 217-230

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    Handle: RePEc:wly:agribz:v:20:y:2004:i:2:p:217-230
    Contact details of provider: Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1520-6297

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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    2. Hayenga, Marvin L. & Jiang, Bingrong & Lence, Sergio H., 1996. "Improving Wholesale Beef and Pork Product Cross Hedging," Staff General Research Papers 5004, Iowa State University, Department of Economics.
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    5. Nordhaus, William D, 1987. "Forecasting Efficiency: Concepts and Applications," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 667-74, November.
    6. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    7. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
    8. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    9. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
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    11. Bailey, DeeVon & Brorsen, B. Wade, 1998. "Trends In The Accuracy Of Usda Production Forecasts For Beef And Pork," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
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