Abstract
Traditional approaches to forecast option prices and implement trading strategies make use of implied volatilities. Noh, Engle, and Kane (1994) propose a different approach. Based on conditional variance models of the GARCH type they forecast volatility and use these forecasts to predict future option prices. In combination with simple trading rules Noh et al. evaluate the profitability of these forecasts for the S&P 500 index. In this paper we take up their approach and apply it to Bund future options. We show that volatility forecasts together with simple option trading strategies create value. The profits can be significant even when transaction costs are taken into account.
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Dockner, E.J., Strobl, G. (2005). Volatility Forecasts and the Profitability of Automated Trading Strategies. In: Deissenberg, C., Hartl, R.F. (eds) Optimal Control and Dynamic Games. Advances in Computational Management Science, vol 7. Springer, Boston, MA. https://doi.org/10.1007/0-387-25805-1_8
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DOI: https://doi.org/10.1007/0-387-25805-1_8
Publisher Name: Springer, Boston, MA
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