The forecasting performance of implied volatility from live cattle options contracts: Implications for agribusiness risk management

Mark Manfredo, Dwight R. Sanders

Research output: Contribution to journalArticle

9 Scopus citations

Abstract

This research examines the forecasting performance of implied volatility derived from nearby live cattle options contracts in predicting 1-week volatility of nearby live cattle futures prices. Forecast evaluation is conducted from the perspective of an agribusiness risk manager. The methodology employed avoids overlapping forecast horizons and focuses on forecast errors, minimizing interpretive issues. Results suggest that implied volatility is a biased and inefficient forecast of 1-week nearby live cattle futures price volatility. However, implied volatility encompasses all information provided by a time series alternative, and it has improved as a forecast over time. These findings provide insight to agribusiness risk managers on how to adjust for bias and inefficiency of implied volatility, and provide insight into their information content. [JEL/EconLit citations: Q130, Q140, G130.]

Original languageEnglish (US)
Pages (from-to)217-230
Number of pages14
JournalAgribusiness
Volume20
Issue number2
DOIs
StatePublished - Jan 1 2004

ASJC Scopus subject areas

  • Food Science
  • Geography, Planning and Development
  • Animal Science and Zoology
  • Agronomy and Crop Science
  • Economics and Econometrics

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