GROUP ASSIGNMENT
Questions about this project
No questions about this project may be asked of either academics or teaching assistants. Each group's solution is to be the work of members of that group only. If the project is unclear then discuss it within your own group.
If you find that you need to make an assumption, then do so and write out that assumption explicitly as part of your solution.
Data
The assignment will require you to extract data from two data sets provided on the LMS.
The first "S&P500 options.csv" contains daily data for traditional European S&P500 options from October 30, 2017 to November 30, 2017.
The file contains details on calls and puts for the November 17, 2017 and December 15, 2017 contracts.
The second data set "S&P500.xlsx" contains daily realised volatility estimates (column B) sourced from the Oxford-Man Institute Realized
Library - realized.oxford-man.ox.ac.uk. Column C scales the realized volatility so that it proxies close to close volatility.
QUESTION 2
Assume you are a trader seeking 1 day ahead S&P500 volatility forecasts over the month of November 2017. You require 1 day ahead forecasts that are conditional on the information set available.
To illustrate, the forecast of volatility for November 1, 2017 is conditional on the information available at October 31, 2017. The forecast of volatility for November 2, 2017 is conditional on the information available at November 1, 2017 etc...
You are required to evaluate the forecasting performance of four alternative approaches over November 2017: i) implied at the money volatilities extracted using the BSM; ii) the S&P500 Volatility index or VIX; iii) the Heterogeneous Autoregressive (HAR) model fit to S&P500 realised volatilities (HAR-RV) and iv) the HAR model fit to log S&P500 realised volatilities (HAR-log-RV).
A) IMPLIED VERSUS MODEL BASED VOL FORECASTING
Write a one page report that outlines the merits of volatility forecasting using implied volatility versus model based (time series) forecasts.
B) IMPLIED ATM VOL FORECASTS
i) Using the same assumptions as Question 1 above (i.e risk free rate of 1.30% p.a anda dividend yield of 1.70% p.a) extract the one day ahead forecast of S&P500 volatility for each trading day in November 2017.
You are required to construct your IV forecasts using an appropriately modified version of the technique employed in Fleming et al 1995.
Here your forecast should be an at the money forecast based on the nearby contract with rollover to the next contract at the appropriate point in time.
Show your workings in your excel spreadsheet and label the sheet "IV"
ii) Why is rollover performed prior to expiration and how does this relate to the surface extracted in QUESTION 1 above?
iii) What assumptions about volatility are being made when you implement this forecasting procedure?
References
Corsi, Fulvio. "A simple approximate long-memory model of realized volatility." Journal of Financial Econometrics 7.2 (2009): 174-196.
Fleming, Jeff, Barbara Ostdiek, and Robert E. Whaley. "Predicting stock market volatility: A new measure." Journal of Futures Markets 15.3 (1995): 265-302.
Patton, Andrew J. "Volatility forecast comparison using imperfect volatility proxies." Journal of Econometrics 160.1 (2011): 246-256.