The term structure of implied forward volatility: Recovery and informational content in the corn options market

Using aflexiblemethod,wedevelop the term structure of volatility impliedby corn futures optionswith differing maturities, and evaluate its ability to predict subsequent realized price volatility. The implied forward volatilities anticipate realized volatility well. For the nearby interval, the implied forward volatilities provide unbiased forecasts, and are superior to forecasts based on historical volatilities. For more distant intervals, early-year options predict the direction and magnitude of future volatility changes about as well as a three-year moving average and better than a naı̈ve forecast. However, later-year options display less forecast power in part due to reduced trading activity. Key words: corn options, implied forward volatility, informational content, term structure. Option prices contain information about an as-set’s future volatility. Volatility forecasts ob-tained from observed options premiums are commonly interpreted as the expected volatil-ity until expiration. It is often overlooked that options markets also provide information on the pattern of volatility through time, re