Cifarelli, giulio (2002): The information content of implied volatilities of options on eurodeposit futures traded on the LIFFE: is there long memory? Published in: Studi e Discussioni  Dipartimento di Scienze Economiche  Università di Firenze No. n. 128 (May 2002)

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Abstract
Under rather general conditions Black  Scholes implied volatilities from atthemoney options appropriately quantify, in each period, the market expectations of the average volatility of the return of the underlying asset until contract expiration. The efficiency of these expectation estimates is investigated here, for options on two major short term interest rate futures contracts traded at the LIFFE, using a long memory framework. Over the 1993 – 1997 time interval the performance of implied volatilities is not homogeneous across contracts. Information content and predictive power tests consistently suggest that implied volatility from Short Sterling contracts is more accurate as a future volatility predictor than implied volatility from 3 Month Euromark contracts. The analysis of the efficiency of the transmission of news over time and between contracts provides analogous results. Underreaction of long term volatility to changes in short term volatility is more relevant for the German interest rate contract than for the British one and Short Sterling implied volatility changes do “Granger cause” 3 Month Euromark implied volatility changes pointing to a contagion – like interlinkage. Even in a sophisticated international financial market like the LIFFE implied volatilities have a country specific pattern as traders seem to be more proficient in predicting domestic interest rate volatility. A possible interpretation is that a (foreign) country risk premium introduces a bias in the Black – Scholes implied volatility estimates. Whether this result is general or is instead restricted to the time period and/or to the contracts under investigation provides the scope for future research.
Item Type:  MPRA Paper 

Original Title:  The information content of implied volatilities of options on eurodeposit futures traded on the LIFFE: is there long memory? 
Language:  English 
Keywords:  Options; stochastic volatility; long memory; ARFIMA 
Subjects:  G  Financial Economics > G1  General Financial Markets > G14  Information and Market Efficiency; Event Studies C  Mathematical and Quantitative Methods > C2  Single Equation Models; Single Variables > C22  TimeSeries Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models 
Item ID:  28538 
Depositing User:  Giulio Cifarelli 
Date Deposited:  04. Feb 2011 06:49 
Last Modified:  18. Feb 2013 00:15 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/28538 