Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options
By: Egelkraut, Thorsten M.; Garcia, Philip
Egelkraut, Thorsten M.; Garcia, Philip, Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options, Journal of Agricultural and Resource Economics, Volume 31, Issue 3, December 2006, Pages 508-528
Options with different maturities can be used to generate an implied forward volatility, a volatility forecast for non-overlapping future time intervals. Using five commodities with varying characteristics, we find that the implied forward volatility dominates forecasts based on historical volatility information, but that the predictive accuracy is affected by the commodity's characteristics. Unbiased and efficient corn and soybeans market forecasts are attributable to the well-established volatility during crucial growing periods. For soybean meal, wheat, and hogs, volatility is less predictable and investors appear to demand a risk premium for bearing volatility risk.