Forecasting Volatility in the Presence of Limits to Arbitrage
In this paper,we develop a novel model to forecast the volatility of S&P 500 futures returns by considering measures of limits to arbitrage.When arbitrageurs face constraints on their trading strategies,option prices can become disconnected from fundamentals,resulting in a premium that reflects the limits to arbitrage.The corresponding market based implied volatility may therefore also contain these distortions.We argue that limits to arbitrage can be systematic or idiosyncratic and we search for proxies to capture these effects.Our contributions are both conceptual and empirical.Conceptually,the distinction between systematic and idiosyncratic effects of limits to arbitrage can shed light on relative asset prices as exemplified by this particular study.Empirically,our volatility forecasting model explains 71% of the variation in realized volatility,a substantial improvement over a naive forecast based only on lagged realized volatility,which produces an R2 of 53%.
Lu Hong Tom Nohel Steven Todd
Loyola University Chicago,1 East Pearson St.,Chicago,IL 60611
国际会议
2013 China Finance Review International Conference(第六届(2013)中国金融评论国际研讨会)
上海
英文
601-643
2013-07-08（万方平台首次上网日期，不代表论文的发表时间）