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  6. A Forward-Looking Factor Model for Volatility: Estimation and Implications for Predicting Disasters

A Forward-Looking Factor Model for Volatility: Estimation and Implications for Predicting Disasters

File(s)
Fang5_A_factor.pdf (902.36 KB)
Permanent Link(s)
https://hdl.handle.net/1813/71365
Collections
SHA Working Papers
Author
Kadan, Ohad
Liu, Fang Ph.D
Tang, Xiaoxiao
Abstract

We show that any factor structure for stock returns can be naturally translated into a factor structure for return volatility. We use this structure to propose a methodology for estimating forward-looking variances and covariances of both factors and individual assets from option prices at a high frequency. We implement the model empirically and show that our forward-looking volatility estimates provide useful predictions of rare disasters for both factors and individual stocks.

Date Issued
2017-10-01
Keywords
stock return
•
volatility
•
S&P 500 stocks
•
facture structure
•
Fam-MacBeth
Rights
Required Publisher Statement: Copyright held by the authors.
Type
preprint

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