This chapter surveys the methods available for extracting information from option prices that can be used in forecasting. We consider option-implied volatilities, skewness, kurtosis, and densities. More generally, we discuss how any forecasting object that is a twice differentiable function of the future realization of the underlying risky asset price can utilize option-implied information in a well-defined manner. Going beyond the univariate option-implied density, we also consider results on option-implied covariance, correlation and beta forecasting, as well as the use of option-implied information in cross-sectional forecasting of equity returns. We discuss how option-implied information can be adjusted for risk premia to remove biases in forecasting regressions.
|Title of host publication||Handbook of Economic Forecasting|
|Editors||Graham Elliott, Allan Timmermann|
|Place of Publication||Amsterdam|
|ISBN (Print)||9780444536839, 9780444627315|
|Publication status||Published - 2013|
|Series||Handbooks in Economics|