The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market

Posted: 7 Feb 2007

See all articles by Thorsten M. Egelkraut

Thorsten M. Egelkraut

Oregon State University - Department of Applied Economics; University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Bruce J. Sherrick

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

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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.

Suggested Citation

Egelkraut, Thorsten M. and Garcia, Philip and Sherrick, Bruce, The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market. American Journal of Agricultural Economics, Vol. 89, No. 1, pp. 1-11, February 2007, Available at SSRN: https://ssrn.com/abstract=961662 or http://dx.doi.org/10.1111/j.1467-8276.2007.00958.x

Thorsten M. Egelkraut (Contact Author)

Oregon State University - Department of Applied Economics ( email )

213 Ballard Extension Hall
Corvallis, OR 97331-4501
United States

HOME PAGE: http://arec.oregonstate.edu/faculty.html

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
Urbana, IL 61801
United States

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)

Bruce Sherrick

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
Center for Farm and Rural Business Finance
Urbana, IL 61801
United States
(217) 244-2637 (Phone)

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