Economics, Econometrics and Finance
4 years ago

Using realized volatility boosts option pricing accuracy but not trading profits.

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The Journal of Financial Research
THE ECONOMIC VALUE OF USING REALIZED VOLATILITY IN FORECASTING FUTURE IMPLIED VOLATILITY
Wing Hong Chan, Ranjini Jha, Madhu Kalimipalli

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The article explores using past market volatility to predict future market volatility in S&P 500 options trading. By combining historical volatility with current market expectations, researchers found that this method improved forecasting accuracy. However, when considering transaction costs, there were no significant financial benefits in actual trading and hedging strategies.