NBER Working Paper No. To forecast future option prices, autoregressive models of implied volatility derived from observed option prices are commonly employed [see Day and Lewis , and Harvey and Whaley ]. In contrast, the ARCH model proposed by Engle models the dynamic behavior in volatility, forecasting future volatility using only the return series of an asset.

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Straddle trading is employed since a straddle does not need to be hedged. Each agent prices options according to her chosen method of forecast, buying selling straddles when her forecast price for tomorrow is higher lower than today's market closing price, and at the end of each day the rates of return are computed.

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We find that the agent using the GARCH forecast method earns greater profit than the agent who uses the implied volatility regression IVR forecast model. Machine-readable bibliographic record - MARC , RIS , BibTeX.

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Engle , Alex Kane NBER Working Paper No. AP To forecast future option prices, autoregressive models of implied volatility derived from observed option prices are commonly employed [see Day and Lewis , and Harvey and Whaley ]. Engle, Kane, and Noh w Index-Option Pricing with Stochastic Volatility and the Value of Accurate Variance Forecasts Engle, Hong, and Kane w Valuation of Variance Forecast with Simulated Option Markets Gorton, Huang, and Kang w The Limitations of Stock Market Efficiency: National Bureau of Economic Research, Massachusetts Ave.

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Forecasting Future Volatility from Option Prices by Allen M. Poteshman :: SSRN

He is also the Mitsui Professor of Economics at M. Denis Healy, Director of Development NBER Massachusetts Avenue Cambridge, MA ph: Price Informativeness and CEO Turnover.

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