A1459
Title: Forecasting market returns with implied correlation: The benefits of using horizon-specific information
Authors: Jaideep Oberoi - SOAS University of London (United Kingdom) [presenting]
Nikolaos Voukelatos - University of Kent (United Kingdom)
Xiaohang Sun - University of Kent (United Kingdom)
Abstract: Option-implied correlation has been shown to be an efficient predictor of market returns. Implied correlation is decomposed into a high-frequency and low-frequency component to examine whether its informational content is horizon-specific. It is shown that the high-frequency component is a robust predictor of market returns at shorter horizons, outperforming the original series of implied correlations. Similarly, the low-frequency component optimally predicts market returns at longer horizons. Decomposing implied correlation substantially improves the out-of-sample predictability of market returns at horizons of up to one year.
