Volatility and Price Information Contained in Selected Agricultural Futures Options

This dissertation assesses the volatility and price information contained in selected agricultural futures options with respect to three important dimensions: (1) forecasts of future levels of volatility, (2) forecasts of the direction and magnitude of changes in future volatility, and (3) forecasts of subsequent futures prices in the presence of limit moves. First, options with different maturities are used to recover the implied forward volatility, a volatility forecast for non-overlapping future time intervals, and to generate the term structure of future volatility. Analyzing five commodities---corn, soybeans, soybean meal, wheat, and hogs---we find that the implied forward volatility dominates forecasts based on historical volatility information for the nearby interval of the term structure where predictive accuracy is affected by the commodity's characteristics. Unbiased and efficient corn and soybeans market forecasts are attributable to the well-established volatility during critical growing periods. For soybean meal, wheat, and hogs volatility is less predictable, and investors appear to demand a risk premium for bearing volatility risk. For more distant time intervals of the term structure, the implied forward volatility is less able to predict the direction and magnitude of future volatility changes, but continues to contain meaningful information. Second, options with identical maturities but different strike prices are used in a simultaneous estimation procedure to forecast futures prices when trading in the underlying contract is temporarily ceased. This procedure explicitly allows for changing implied volatilities by estimating the implied futures price and the implied volatility simultaneously. Our results show that the simultaneous estimation approach accounts for the abrupt changes in implied volatility associated with limit moves and generates more accurate price forecasts than conventional methods that rely on only one implied variable.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Agricultural and Consumer Economics

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2015

Author dc:creator

• Egelkraut, Thorsten Michael

Contributors dc:contributor

• Garcia, Philip

• Economics, Finance

Language dc:language

eng

Identifier

(MiAaPQ)AAI3182256

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/82973