The Forecasting Efficacy of Risk-Neutral Moments for Crude Oil Volatility

This paper examines the information content of implied volatility for crude oil options as it relates to future realized volatility. Using data for the period 1996 to 2011 we find that implied volatility is an effective predictor of the month-ahead realized volatility. We show that implied volatility subsumes the information content of contemporaneous volatility, and it contains incremental information on future volatility after controlling for contemporaneous volatility. Furthermore, incorporating risk-neutral skewness, and especially kurtosis, improves the forecasting of realized volatility. Overall, the association between implied volatility and month-ahead realized volatility is consistent with evidence documented for other asset classes, leading us to conclude that implied volatility serves as a reasonable proxy for expected volatility