A Forward-Looking Factor Model for Volatility: Estimation and Implications for Predicting Disasters
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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
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Required Publisher Statement: Copyright held by the authors.
Type
preprint