The previous video in this series is here.
There has been a recent dramatic increase in trading on exchanges of short-dated options, i.e., options with very short time to expiration. This workshop covers non-parametric methods for extracting information from these options. Formal non-parametric econometric analysis of derivatives data has proved difficult. The complications arise from the highly non-linear dependence of option prices on state variables and parameters as well as the possible dependence in the option observation errors. The short-dated options allow to aggregate option data in ways that facilitate the practical application of asymptotic expansions for option maturities approaching zero.
We first start by introducting various model-free measures of spot volatility. These measures separate true spot volatility from the price jump component (and its pricing) as well as the volatility mean-reversion effects present in option prices. Following that, we introduce measures of risk-neutral jump variation and jump tails as well as methods for studying anticipated event risks. Empirical illustrations of the methods will be presented along with various applications for studying volatility forecasting, return predictability via option measures and analysis of risk premia.
This video was produced by the Fields Institute and is part of the 6th Conference on Financial Econometrics and Risk Management