Options-based forecasts of futures prices in the presence of limit moves

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Abstract:

The reported analysis examines a simultaneous estimation option-based approach to forecast futures prices in the presence of daily price limit moves. The procedure explicitly allows for changing implied volatilities by estimating the implied futures price and the implied volatility simultaneously. Using futures and futures options data for three agricultural commodities, it is found that the simultaneous estimation approach accounts for the abrupt changes in implied volatility associated with limit moves and generates more accurate price forecasts than conventional methods that rely on only one implied variable.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500427478

Affiliations: 1: Agricultural and Resource Economics, Oregon State University, Corvallis, USA 2: Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, USA

Publication date: February 1, 2007

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