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Implied volatility from options on gold futures: do statistical forecasts add value or simply paint the lilly?

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Abstract

Consistent with findings in other markets, implied volatility is a biased predictor of the realized volatility of gold futures. No existing explanation?including a price of volatility risk?can completely explain the bias, but much of this apparent bias can be explained by persistence and estimation error in implied volatility. Statistical criteria reject the hypothesis that implied volatility is informationally efficient with respect to econometric forecasts. But delta hedging exercises indicate that such econometric forecasts have no incremental economic value. Thus, statistical measures of bias and information efficiency are misleading measures of the information content of option prices.

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  • Christopher J. Neely, 2004. "Implied volatility from options on gold futures: do statistical forecasts add value or simply paint the lilly?," Working Papers 2003-018, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2003-018
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    Cited by:

    1. Demirer, Riza & Gkillas, Konstantinos & Gupta, Rangan & Pierdzioch, Christian, 2019. "Time-varying risk aversion and realized gold volatility," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    2. Christopher J. Neely & Drew B. Winters, 2005. "Year-end seasonality in one-month LIBOR derivatives," Working Papers 2003-040, Federal Reserve Bank of St. Louis.
    3. Hui Guo & Christopher J. Neely & Jason Higbee, 2008. "Foreign Exchange Volatility Is Priced in Equities," Financial Management, Financial Management Association International, vol. 37(4), pages 769-790, December.
    4. Viteva, Svetlana & Veld-Merkoulova, Yulia V. & Campbell, Kevin, 2014. "The forecasting accuracy of implied volatility from ECX carbon options," Energy Economics, Elsevier, vol. 45(C), pages 475-484.

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    Keywords

    Gold; Futures; Forecasting;
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