Implied volatility surface predictability: The case of commodity markets

Implied volatility surface

The widespread practice of quoting option prices in terms of their Black-Scholes implied volatilities (IVs) in no way implies that market participants believe underlying returns to be lognormal. On the contrary, the variation of IVs across option strike and term to maturity, which is widely referred to as the volatility surface, can be substantial. In this brief review, we highlight some empiri...

Implied Volatility Surface Construction

Implied volatility surfaces are central tools used for pricing options. This thesis treats the topic of their construction. The main purpose is to uncover the most appropriate methodology for constructing implied volatility surfaces from discrete data and evaluate how well it performs. First some methods and techniques in use for such surface constructing are presented. Then the most attractive...

Option Returns and the Cross-Sectional Predictability of Implied Volatility∗

I study the cross-section of realized stock option returns and find an economically important source of predictability in the cross-sectional distribution of implied volatility. A zero-cost trading strategy that is long in straddles with a large positive forecast of the change in implied volatility and short in straddles with a large negative forecast produces an economically important and stat...

Correlation in Volatility Among Related Commodity Markets

Related commodity markets have two characteristics: (i) they may follow similar volatility processes; and (ii) such markets are frequently represented by a market aggregate or index. Indices are used to represent the performance and time series properties of a group of markets. An important issue regarding the time series properties of an index is how it reflects the time series properties of i...

Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options by