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Forecasting with Option-Implied Information

In: Handbook of Economic Forecasting

Author

Listed:
  • Christoffersen, Peter
  • Jacobs, Kris
  • Chang, Bo Young
Abstract
This chapter surveys the methods available for extracting information from option prices that can be used in forecasting. We consider option-implied volatilities, skewness, kurtosis, and densities. More generally, we discuss how any forecasting object that is a twice differentiable function of the future realization of the underlying risky asset price can utilize option-implied information in a well-defined manner. Going beyond the univariate option-implied density, we also consider results on option-implied covariance, correlation and beta forecasting, as well as the use of option-implied information in cross-sectional forecasting of equity returns. We discuss how option-implied information can be adjusted for risk premia to remove biases in forecasting regressions.

Suggested Citation

  • Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    • Handle: RePEc:eee:ecofch:2-581
    DOI: 10.1016/B978-0-444-53683-9.00010-4
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    More about this item

    Keywords

    Volatility; Skewness; Kurtosis; Density forecasting; Risk-neutral;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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