Marie-Hélène Gagnon
9:00am to 10:00am
Gilles Dufrénot: gilles.dufrenot[at]sciencespo-aix.fr
Kiyotaka Sato: sato[at]ynu.ac.jp
How is volatility transmitted between options and futures contracts, and can this information transmission be used to generate profitable trading strategies? We examine the bidirectional relationship in volatility between commodity options and futures markets for key commodities to learn about how each market influences the other. To this end, we estimate volatility forecasting models using random forests and we calculate connectedness and spillover measures. We find that futures volatility has a strong but short-lived impact on option volatility, while option volatility has a longer lasting effect on futures volatility, confirming a bidirectional volatility transmission. We further document important net spillovers from options to futures. Moreover, predictive analysis shows that option markets generally lead futures markets in terms of providing information that is relevant for trading strategies. We obtain more accurate futures volatility predictions and trading strategies generate superior economic gains.