Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/80743 
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Working Paper No. 2012-34
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added. To do so we develop a new class of affine discrete-time option valuation models that use daily returns as well as realized volatility. We derive convenient closed-form option valuation formulas and we assess the option valuation properties using S&P500 return and option data. We find that realized volatility reduces the pricing errors of the benchmark model significantly across moneyness, maturity and volatility levels.
Subjects: 
Asset pricing
Econometric and statistical methods
JEL: 
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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