The Informational Content of High-Frequency Option Prices

Abstract

We propose the option realized variance as an observable variable to summarize information from high-frequency option data. This variable aggregates intraday option returns from midquote prices to compute the option's total variability for a given day. Using the S&P 500 index time series and options data, this paper documents the incremental information offered by this realized measure in predicting the index realized variance as well as the equity and variance risk premiums. In a parametric study, our results show that the information contained in the option realized variance improves the inference of model variables such as the instantaneous variance and its jumps. Parameter estimates indicate that omitting this information can affect the risk premium breakdown between jump and diffusive risks.

Keywords: High-frequency data, realized option variance, options, jump-diffusions

JEL Classification: C52, C55, C58, C63