Information content of volatilities implied by option premiums in grain futures markets

Wilson, William W.; Fung, Hung‐Gay

doi:10.1002/fut.3990100103

Cited by 7 publications

(2 citation statements)

References 20 publications

(31 reference statements)

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“…Unanticipated information should lead to a change in either p or (T, or both. Anticipated informton should be fully reflected in option prices and therefore should not influence p or (T [Wilson and Fung (1990)l. Thus, information that is always anticipated has no impact on market beliefs and should be of no value to traders.…”

Section: The Role Of Options In Interpreting Informationmentioning

confidence: 99%

The informational content of USDA crop reports: Impacts on uncertainty and expectations in grain futures markets

McNew¹,

Espinosa²

1994

Journal of Futures Markets

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The current price of a futures contract conveys the expected price, as determined by the market, at the contract expiration date. However, futures prices do not indicate the degree of certainty that the market places on this price forecast. To obtain the market's certainty level about the price expectation, one must look at option prices. In fact, through option prices one can uncover the ex ante price probability distribution function.One factor which influences the shape or moments of the price distribution is information. New information induces traders to reevaluate their current expectations about future economic conditions. If traders' expectations change, then one should observe changes in the moments of the distribution. For example, information that makesThe authors are grateful to Scott Irwin, Paul Fackler, and Randy Fortenbery for their insightful suggestions and discourse on this subject.

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Section: The Role Of Options In Interpreting Informationmentioning

confidence: 99%

The informational content of USDA crop reports: Impacts on uncertainty and expectations in grain futures markets

McNew¹,

Espinosa²

1994

Journal of Futures Markets

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“…These markets collectively are referred to as the grains markets for expositional ease, even though soybeans are an oilseed rather than a grain. Wilson and Fung (1990) examine the forecasting power of implied volatilities over the first 2 years of grains option trading from 1985-1986 and find mixed results. Christensen and Prabhala (1998) argue that one of the reasons that S&P 100 index implied volatility has predictive power from 1983-1995 is that the signal-to-noise ratio of implied volatility rose after the stock market crash because realized volatility rose sharply relative to implied volatility.…”

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confidence: 96%

Implied volatility forecasts in the grains complex

Simon

2002

Journal of Futures Markets

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This article finds that the implied volatilities of corn, soybean, and wheat futures options 4 weeks before option expiration have significant predictive power for the underlying futures contract return volatilities through option expiration from January 1988 through September 1999. These implied volatilities also encompass the information in out-of-sample seasonal Glosten, Jagannathan, and Runkle (GJR; 1993) volatility forecasts. Evidence also demonstrates that when corn-implied volatility rises relative to out-of-sample seasonal GJR volatility forecasts, implied volatility substantially overpredicts realized volatility. However, simulations of trading rules that involve selling corn option straddles when corn-implied volatility is high relative to out-of-sample GJR volatility forecasts indicate that none of the trading rules would have been significantly profitable. This finding suggests that these options are not necessarily overpriced. Canina and Figlewski (1993) point out that implied volatility should reflect the market's assessment of realized volatility through option expiration and not necessarily over the following week. In each of their subsamples, implied volatility fails the unbiasedness tests, and in only 6 of 32 subsamples are the coefficients on implied volatility significantly greater than zero at the 5% level. These markets collectively are referred to as the grains markets for expositional ease, even though soybeans are an oilseed rather than a grain. Wilson and Fung (1990) examine the forecasting power of implied volatilities over the first 2 years of grains option trading from 1985-1986 and find mixed results. Christensen and Prabhala (1998) argue that one of the reasons that S&P 100 index implied volatility has predictive power from 1983-1995 is that the signal-to-noise ratio of implied volatility rose after the stock market crash because realized volatility rose sharply relative to implied volatility.

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