Informational content of volatility forecasts in eurodollar markets

Abstract

The volatility of asset prices as a measure of risk in the financial market has motivated many financial economists and industry professionals, and induced the innovation in the financial markets. The paper studies how expectations of future volatility are formed, and whether or not historical or implied volatilities measures for different maturity and moneyness of options have any information to explain ex post actual volatility over the life of the options in Eurodollar futures and futures options markets. Employing the autocorrelation and heteroscedasticity consistent GMM regression test, we find that the volatilities implied in the at-the-money options tend to outperform the in-the-money or out-of-the-money implied volatilities and different definitions of historical volatilities.