Speaker: Qian Han, Xiamen University
Host: Lin Huang, Associate professor, RIEM
Time: 14:30-16:00, March 20, Friday
Venue: Yide Building H503, Liulin Campus
Abstract: Neumann and Skiadopoulos (2013) document that although the implied volatilities are predictable, their economic profits become insignificant once the cost is accounted for. In this study we show that the trading strategies based on the predictability of implied volatilities could generate significant risk-adjusted returns after controlling for the transaction cost. The results show that implied volatility curve information is useful for the out-of-sample forecast of implied volatilities with different maturities up to one week when daily data are used. Short-maturity implied volatilities tend to be more predictable than long-maturity implied volatilities. Further analysis shows that although the long-maturity options are much less traded than the short-maturity options, their implied volatilities provide much more important information on the price discovery of term structure of implied volatilities.
Keywords: out-of-sample forecast; implied volatility; economic significance; price discovery; market efficiency.
