The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market |
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| Authors: | Thorsten M Egelkraut Philip Garcia Bruce J Sherrick |
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| Institution: | Thorsten M. Egelkraut, Philip Garcia, and Bruce J. Sherrick are Assistant Professor in the Department of Agricultural and Resource Economics at Oregon State University (), Professor and T. A. Hieronymus Chair, and Professor and Director of the Center for Farm and Rural Business Finance;in the Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, respectively. The authors are also affiliates of the Office for Futures and Options Research at the University of Illinois at Urbana-Champaign. |
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| Abstract: | Using a flexible method, we develop the term structure of volatility implied by corn futures options with differing maturities, and evaluate its ability to predict subsequent realized price volatility. The implied forward volatilities anticipate realized volatility well. For the nearby interval, the implied forward volatilities provide unbiased forecasts, and are superior to forecasts based on historical volatilities. For more distant intervals, early-year options predict the direction and magnitude of future volatility changes about as well as a three-year moving average and better than a naïve forecast. However, later-year options display less forecast power in part due to reduced trading activity. |
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| Keywords: | corn options implied forward volatility informational content term structure |
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