Reliability of soybean and corn option‐based probability assessments

Silva, Elvira Maria de Sousa; Kahl, Kandice H.

doi:10.1002/fut.3990130705

“…Fackler and King applied their calibration function to various agricultural commodity options and found that the lognormal distribution obtained from parametric Black-Scholes model fit most of the price distributions they assessed. Silva and Kahl (1993) looked at more recent data for some of the same markets that Fackler and King investigated, and found that the fit of the lognormal risk-neutral distribution improved in the later years, suggesting that prices in immature or illiquid markets tend to be less efficient. Dumas, Fleming and Whaley (1998) defined a statistical measure, the hedge portfolio error, to compare the forecasting performance of various option pricing techniques.…”

Section: Information Content Of the Probability Density Functionmentioning

confidence: 99%

Interpreting the Volatility Smile: An Examination of the Information Content of Option Prices

Weinberg

¹

2001

internationalfinance

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This paper evaluates how useful the information contained in options prices is for predicting future price movements of the underlying assets. We develop an improved semiparametric methodology for estimating risk-neutral probability density functions (PDFs), which allows for skewness and intertemporal variation in higher moments. We use this technique to estimate a daily time series of riskneutral PDFs spanning the late 1980's through 1999, for S&P 500 futures, U.S. dollar/Japanese yen futures and U.S. dollar/deutsche mark futures, using options on these futures. For the foreign exchange futures, we find little discernable additional information contained in the estimated PDFs beyond the information derived from the Black-Scholes model, a fully parametric specification. For S&P 500 futures, we find that the riskneutral distribution implied by the volatility smile better fits the realized returns than the Black-Scholes model, although this better overall fit is not exhibited in the second and third moments.

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“…Fackler and King (1990) is an early study of the forecast of returns and volatility using option-implied information. Their results are confirmed in Silva and Kahl (1993). Melick and Thomas (1997) use option-implied densities from American options on WTI crude oil to predict future oil prices, and find some predictability.…”

Section: Introductionmentioning

confidence: 72%

A fear index to predict oil futures returns

Chevallier

¹

,

Sévi

²

2014

Energy Studies Review

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This paper evaluates the predictability of WTI light sweet crude oil futures by using the variance risk premium, i.e. the difference between model-free measures of implied and realized volatilities. Additional regressors known for their ability to explain crude oil futures prices are also considered, capturing macroeconomic, financial and oil-specific influences. The results indicate that the explanatory power of the (negative) variance risk premium on oil excess returns is particularly strong (up to 25% for the adjusted Rsquared across our regressions). It complements other financial (e.g. default spread) and oil-specific (e.g. US oil stocks) factors highlighted in previous literature.

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“…Fackler and King applied their calibration function to various agricultural commodity options and found that the lognormal distribution obtained from parametric Black-Scholes model fit most of the price distributions they assessed. Silva and Kahl (1993) looked at more recent data for some of the same markets that Fackler and King investigated, and found that the fit of the lognormal risk-neutral distribution improved in the later years, suggesting that prices in immature or illiquid markets tend to be less efficient.…”

Section: Information Content Of the Probability Density Functionmentioning

confidence: 99%

Interpreting the Volatility Smile: An Examination of the Information Content of Option Prices

Weinberg

¹

2001

View full text Add to dashboard Cite

This paper evaluates how useful the information contained in options prices is for predicting future price movements of the underlying assets. We develop an improved semiparametric methodology for estimating risk-neutral probability density functions (PDFs), which allows for skewness and intertemporal variation in higher moments. We use this technique to estimate a daily time series of riskneutral PDFs spanning the late 1980's through 1999, for S&P 500 futures, U.S. dollar/Japanese yen futures and U.S. dollar/deutsche mark futures, using options on these futures. For the foreign exchange futures, we find little discernable additional information contained in the estimated PDFs beyond the information derived from the Black-Scholes model, a fully parametric specification. For S&P 500 futures, we find that the riskneutral distribution implied by the volatility smile better fits the realized returns than the Black-Scholes model, although this better overall fit is not exhibited in the second and third moments.JEL Classification: F31, G13, G15

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Reliability of soybean and corn option‐based probability assessments

Cited by 11 publications

References 7 publications

Interpreting the Volatility Smile: An Examination of the Information Content of Option Prices

Interpreting the Volatility Smile: An Examination of the Information Content of Option Prices

A fear index to predict oil futures returns

Interpreting the Volatility Smile: An Examination of the Information Content of Option Prices

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