Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios |
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| Authors: | Gurdip Bakshi George Panayotov Georgios Skoulakis |
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| Affiliation: | 1. Smith School of Business, University of Maryland, College Park, MD 20742, USA;2. McDonough School of Business, Georgetown University, Washington, DC 20057, USA;3. Smith School of Business, University of Maryland, College Park, MD 20742, USA |
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| Abstract: | This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and (iv) changes in variance swap rates. Our yardstick for measuring predictive ability is both individual and joint parameter statistical significance within a market, as well as across a set of markets. |
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| Keywords: | Predictability Traded market variance Real economic activity Treasury returns Stock market returns Joint predictability |
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