The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation. (28th July 2014)

• Record Type: Journal Article
• Authors: Christoffersen, Peter; Feunou, Bruno; Jacobs, Kris; Meddahi, Nour
• Is Part Of: Journal of financial and quantitative analysis. Volume 49:Number 3(2015)
• Page Start: 663
• Page End: 697
• Publication Date: 2014-07-28
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109014000428
• Languages: English
• ISSNs: 0022-1090

Abstract

<abstract abstract-type="normal"> <title>Abstract</title> <p>Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so, we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas, and we assess the option valuation properties using Standard &amp; Poor's (S&amp;P) 500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity, and volatility levels.</p> </abstract>