The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation

Peter Christoffersen, Bruno Feunoua, Kris Jacobs, Nour Meddahi

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so, we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas, and we assess the option valuation properties using Standard & Poor’s (S&P) 500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity, and volatility levels.
Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Volume49
Issue number3
Pages (from-to)663-697
ISSN0022-1090
DOIs
Publication statusPublished - 2014

Cite this