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Forecasting The Distribution Of Option Returns
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Book Synopsis Forecasting the Distribution of Option Returns by : Roni Israelov
Download or read book Forecasting the Distribution of Option Returns written by Roni Israelov and published by . This book was released on 2017 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a method for constructing conditional option return distributions. In our model, uncertainty about the future option return has two sources: Changes in the position and shape of the implied volatility surface that shift option values (holding moneyness and maturity fixed), and changes in the underlying price which alter an option's location on the surface and thus its value (holding the surface fixed). We estimate a joint time series model of the spot price and volatility surface and use this to construct an ex ante characterization of the option return distribution via bootstrap. Our "ORB" (option return bootstrap) model accurately forecasts means, variances, and extreme quantiles of S&P 500 index conditional option return distributions across a wide range of strikes and maturities. We illustrate the value of our approach for practical economic problems such as risk management and portfolio choice. We also use the model to illustrate the risk and return tradeoff throughout the options surface conditional on being in a high or low risk state of the world. Comparing against our less structured but more accurate model predictions helps identify misspecification of risks and risk pricing in traditional no-arbitrage option models with stochastic volatility and jumps.
Book Synopsis Forecasting Expected Returns in the Financial Markets by : Stephen Satchell
Download or read book Forecasting Expected Returns in the Financial Markets written by Stephen Satchell and published by Elsevier. This book was released on 2011-04-08 with total page 299 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasting returns is as important as forecasting volatility in multiple areas of finance. This topic, essential to practitioners, is also studied by academics. In this new book, Dr Stephen Satchell brings together a collection of leading thinkers and practitioners from around the world who address this complex problem using the latest quantitative techniques. *Forecasting expected returns is an essential aspect of finance and highly technical *The first collection of papers to present new and developing techniques *International authors present both academic and practitioner perspectives
Book Synopsis Learning and Forecasts about Option Returns Through the Volatility Risk Premium by : Alejandro Bernales
Download or read book Learning and Forecasts about Option Returns Through the Volatility Risk Premium written by Alejandro Bernales and published by . This book was released on 2019 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use learning in an equilibrium model to explain the puzzling predictive power of the volatility risk premium (VRP) for option returns. In the model, a representative agent follows a rational Bayesian learning process in an economy under incomplete information with the objective of pricing options. We show that learning induces dynamic differences between probability measures P and Q, which produces predictability patterns from the VRP for option returns. The forecasting features of the VRP for option returns, obtained through our model, exhibit the same behaviour as those observed in an empirical analysis with S&P 500 index options.
Book Synopsis Equity Return Forecasting Using Risk-Neutral Option-Implied Moments by : Charles-Gabriel Filion
Download or read book Equity Return Forecasting Using Risk-Neutral Option-Implied Moments written by Charles-Gabriel Filion and published by . This book was released on 2020 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using OptionMetrics implied volatility surfaces for a sample of S&P 100 constituent stocks as of April 29, 2016, with historical data spanning from January 1996 to April 2016, this research provides additional empirical data regarding the informational content of option implied risk-neutral distributions. Two different methodologies are used to compute option-implied moments for the years 1996-2016: the first is based on Breeden-Litzenberger (1978) and the other on Bakshi, Kapadia and Madan (2003).
Book Synopsis A Time Series Approach to Option Pricing by : Christophe Chorro
Download or read book A Time Series Approach to Option Pricing written by Christophe Chorro and published by Springer. This book was released on 2014-12-04 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: The current world financial scene indicates at an intertwined and interdependent relationship between financial market activity and economic health. This book explains how the economic messages delivered by the dynamic evolution of financial asset returns are strongly related to option prices. The Black Scholes framework is introduced and by underlining its shortcomings, an alternative approach is presented that has emerged over the past ten years of academic research, an approach that is much more grounded on a realistic statistical analysis of data rather than on ad hoc tractable continuous time option pricing models. The reader then learns what it takes to understand and implement these option pricing models based on time series analysis in a self-contained way. The discussion covers modeling choices available to the quantitative analyst, as well as the tools to decide upon a particular model based on the historical datasets of financial returns. The reader is then guided into numerical deduction of option prices from these models and illustrations with real examples are used to reflect the accuracy of the approach using datasets of options on equity indices.
Book Synopsis Forecasting Volatility in the Financial Markets by : John L. Knight
Download or read book Forecasting Volatility in the Financial Markets written by John L. Knight and published by Butterworth-Heinemann. This book was released on 2002 with total page 428 pages. Available in PDF, EPUB and Kindle. Book excerpt: This text assumes that the reader has a firm grounding in the key principles and methods of understanding volatility measurement and builds on that knowledge to detail cutting edge modeling and forecasting techniques. It then uses a technical survey to explain the different ways to measure risk and define the different models of volatility and return.
Book Synopsis The Risk-Neutral Distribution of Option Returns by : Turan G. Bali
Download or read book The Risk-Neutral Distribution of Option Returns written by Turan G. Bali and published by . This book was released on 2017 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the first study on the risk-neutral distribution of option returns. We derive solutions for the risk-neutral variance, skewness, and kurtosis of call and put option returns and document several properties of these ex-ante moments. We find that the volatility, skewness, and kurtosis of both call and put returns are higher (lower) for options that are further out-of-the-money (in-the-money). The risk-neutral moments of call returns are increasing in the volatility of the underlying security, while the opposite is true for put returns. Call return moments have strong negative time-series correlation with put return moments. We find that the magnitudes of the risk-neutral and physical moments differ substantially, indicating significant option volatility, skewness, and kurtosis risk premia. The option volatility risk premium is significantly higher than the stock volatility risk premium.
Book Synopsis Trois essais sur le contenu informatif de la distribution des rendements implicite aux prix des options - Three essays on the informative content of the option-implied return distribution by : Dominique Toupin
Download or read book Trois essais sur le contenu informatif de la distribution des rendements implicite aux prix des options - Three essays on the informative content of the option-implied return distribution written by Dominique Toupin and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Résumé en anglais
Book Synopsis Volatility and Correlation by : Riccardo Rebonato
Download or read book Volatility and Correlation written by Riccardo Rebonato and published by John Wiley & Sons. This book was released on 2005-07-08 with total page 864 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Volatility and Correlation 2nd edition: The Perfect Hedger and the Fox, Rebonato looks at derivatives pricing from the angle of volatility and correlation. With both practical and theoretical applications, this is a thorough update of the highly successful Volatility & Correlation – with over 80% new or fully reworked material and is a must have both for practitioners and for students. The new and updated material includes a critical examination of the ‘perfect-replication’ approach to derivatives pricing, with special attention given to exotic options; a thorough analysis of the role of quadratic variation in derivatives pricing and hedging; a discussion of the informational efficiency of markets in commonly-used calibration and hedging practices. Treatment of new models including Variance Gamma, displaced diffusion, stochastic volatility for interest-rate smiles and equity/FX options. The book is split into four parts. Part I deals with a Black world without smiles, sets out the author’s ‘philosophical’ approach and covers deterministic volatility. Part II looks at smiles in equity and FX worlds. It begins with a review of relevant empirical information about smiles, and provides coverage of local-stochastic-volatility, general-stochastic-volatility, jump-diffusion and Variance-Gamma processes. Part II concludes with an important chapter that discusses if and to what extent one can dispense with an explicit specification of a model, and can directly prescribe the dynamics of the smile surface. Part III focusses on interest rates when the volatility is deterministic. Part IV extends this setting in order to account for smiles in a financially motivated and computationally tractable manner. In this final part the author deals with CEV processes, with diffusive stochastic volatility and with Markov-chain processes. Praise for the First Edition: “In this book, Dr Rebonato brings his penetrating eye to bear on option pricing and hedging.... The book is a must-read for those who already know the basics of options and are looking for an edge in applying the more sophisticated approaches that have recently been developed.” —Professor Ian Cooper, London Business School “Volatility and correlation are at the very core of all option pricing and hedging. In this book, Riccardo Rebonato presents the subject in his characteristically elegant and simple fashion...A rare combination of intellectual insight and practical common sense.” —Anthony Neuberger, London Business School
Book Synopsis A Practical Guide to Forecasting Financial Market Volatility by : Ser-Huang Poon
Download or read book A Practical Guide to Forecasting Financial Market Volatility written by Ser-Huang Poon and published by John Wiley & Sons. This book was released on 2005-08-19 with total page 236 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial market volatility forecasting is one of today's most important areas of expertise for professionals and academics in investment, option pricing, and financial market regulation. While many books address financial market modelling, no single book is devoted primarily to the exploration of volatility forecasting and the practical use of forecasting models. A Practical Guide to Forecasting Financial Market Volatility provides practical guidance on this vital topic through an in-depth examination of a range of popular forecasting models. Details are provided on proven techniques for building volatility models, with guide-lines for actually using them in forecasting applications.
Book Synopsis Option-Implied Risk-Neutral Distributions and Risk Aversion by : Jens Carsten Jackwerth
Download or read book Option-Implied Risk-Neutral Distributions and Risk Aversion written by Jens Carsten Jackwerth and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Forecasting Dynamic Return Distributions Based on Ordered Binary Choice by : Stanislav Anatolyev
Download or read book Forecasting Dynamic Return Distributions Based on Ordered Binary Choice written by Stanislav Anatolyev and published by . This book was released on 2019 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a simple approach to forecasting conditional probability distributions of asset returns. We work with a parsimonious specification of ordered binary choice regression that imposes a connection on sign predictability across different quantiles. The model forecasts the future conditional probability distributions of returns quite precisely when using a past indicator and past volatility proxy as predictors. Direct benefits of the model are revealed in an empirical application to the 29 most liquid U.S. stocks. The forecast probability distribution is translated to significant economic gains in a simple trading strategy. Our approach can also be useful in many other applications where conditional distribution forecasts are desired.
Book Synopsis A Study of Forecasting Performance of Alternative Option Pricing Models on Option Return and Market Volatility by : Jitao Ou
Download or read book A Study of Forecasting Performance of Alternative Option Pricing Models on Option Return and Market Volatility written by Jitao Ou and published by . This book was released on 2018 with total page 90 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, we investigate the forecasting problem for option return and future volatility in financial market. The first part of this thesis is to study the option return skewness effect and the negative correlation between asset return and volatility. We propose a measure of ex-ante measure of option return skewness which accommodates the negative return-volatility relationship in asset returns. We investigate how time-to-expiration and moneyness affect the skewness and return of an option. Furthermore, we show that our proposed measure has extra benefits in forecasting option returns. In the second part, we test the information contents of implied volatility derived from stochastic volatility option pricing model and also examine the potential benefit of including the model’s implied volatility of volatility in forecasting future volatility and volatility risk premium. Our study finds that the inclusion of volatility of volatility factor has significantly reduced the downward bias of the slope coefficients. Most importantly, the ex-ante volatility of volatility has significant predictive power on the ex-post volatility premium. In the third part, we study the incremental benefit of adding skewness in predicting future realized volatility. The study finds that consistent with the empirical findings in the first part, realized volatility is negatively related to their skewness measure which provides a downward adjustment of the implied volatility forecast.
Book Synopsis Volatility Surface and Term Structure by : Kin Keung Lai
Download or read book Volatility Surface and Term Structure written by Kin Keung Lai and published by Routledge. This book was released on 2013-09-11 with total page 102 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.
Book Synopsis Forecasting Volatility in the Financial Markets by : Stephen Satchell
Download or read book Forecasting Volatility in the Financial Markets written by Stephen Satchell and published by Elsevier. This book was released on 2011-02-24 with total page 428 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasting Volatility in the Financial Markets, Third Edition assumes that the reader has a firm grounding in the key principles and methods of understanding volatility measurement and builds on that knowledge to detail cutting-edge modelling and forecasting techniques. It provides a survey of ways to measure risk and define the different models of volatility and return. Editors John Knight and Stephen Satchell have brought together an impressive array of contributors who present research from their area of specialization related to volatility forecasting. Readers with an understanding of volatility measures and risk management strategies will benefit from this collection of up-to-date chapters on the latest techniques in forecasting volatility. Chapters new to this third edition:* What good is a volatility model? Engle and Patton* Applications for portfolio variety Dan diBartolomeo* A comparison of the properties of realized variance for the FTSE 100 and FTSE 250 equity indices Rob Cornish* Volatility modeling and forecasting in finance Xiao and Aydemir* An investigation of the relative performance of GARCH models versus simple rules in forecasting volatility Thomas A. Silvey Leading thinkers present newest research on volatility forecasting International authors cover a broad array of subjects related to volatility forecasting Assumes basic knowledge of volatility, financial mathematics, and modelling
Book Synopsis Information Content of Option Prices by : Anthony Sanford
Download or read book Information Content of Option Prices written by Anthony Sanford and published by . This book was released on 2019 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: Finance researchers keep producing increasingly complex and computationally-intensive models of stock returns. Separately, professional analysts forecast stock returns daily for their clients. Are the sophisticated methods of researchers achieving better forecasts or are we better off relying on the expertise of analysts on the ground? Do the two sets of actors even capture the same information? In this paper, I hypothesize that analyst forecasts and forecasts constructed using option prices will be different because they draw on different information sets. Using hypothesis tests and quantile regressions, I find that option-based forecasts are statistically significantly different from analyst forecasts at every level of the forecast distribution. Then, using cross-sectional regressions, I show that this difference originates in the distinct information sets used to create the forecasts: option based forecasts incorporate information about the probability of extreme events while analyst forecasts focus on information about firm and macroeconomic fundamentals.
Book Synopsis Computational Intelligence Applications to Option Pricing, Volatility Forecasting and Value at Risk by : Fahed Mostafa
Download or read book Computational Intelligence Applications to Option Pricing, Volatility Forecasting and Value at Risk written by Fahed Mostafa and published by Springer. This book was released on 2017-02-28 with total page 177 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book demonstrates the power of neural networks in learning complex behavior from the underlying financial time series data. The results presented also show how neural networks can successfully be applied to volatility modeling, option pricing, and value-at-risk modeling. These features mean that they can be applied to market-risk problems to overcome classic problems associated with statistical models.
