Do Markets Behave As Expected?
Empirical Test Using Both Implied Volatility And
Futures Prices For The Taiwan Stock Market
Author(s)
A.-P. Chen, H.-Y. Chiu, C.-C. Sheng & Y.-H. Huang
Abstract
This study adopts derivative pricing as an indicator of market expectations, with
those results suggesting that general investors can use market expectations to
predict the final settlement value of underlying assets. Most investment
textbooks note that one of the major functions of futures is price discovery.
Similarly, the implied volatility associated with option prices can be used to
discover the volatility of the underlying asset. This study combines futures price
and implied volatility to establish a probability space of market expectations
regarding the final settlement value of the underlying asset, and verifies this
probability space using empirical data from the Taiwan stock market. The
verification results suggest that market expectations closely reflect the actual
behavior of the final settlement value of the underlying asset, and thus provide a
practical perspective on future price behavior. According to this study, investors
can easily estimate underlying asset behavior based on the behavior of the related
futures and options and without incurring significant measurement error, which
can be helpful in risk management and planning investment strategies.
Keywords: forecasting, market expectation, implied volatility, futures,
probability space.
1 Introduction
Most financial texts confer that the futures markets aggregate diverse
information and expectations regarding the future prices of underlying assets,
and thus provide a common reference price which is known as the price
Keywords
forecasting, market expectation, implied volatility, futures,probability space.
Related Book
Other papers in this volume
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