Moneyness Volatility And The Cross Section Of Option Returns
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Moneyness Volatility And The Cross Section Of Option Returns
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Author : Kevin Aretz
language : en
Publisher:
Release Date : 2018
Moneyness Volatility And The Cross Section Of Option Returns written by Kevin Aretz and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
We study the effect of an asset's volatility on the expected returns of European options written on the asset. A simple stochastic discount factor model suggests that the effect differs depending on whether variations in volatility are due to variations in systematic or idiosyncratic volatility. While variations in idiosyncratic volatility only affect an option's elasticity, variations in systematic volatility also oppositely affect the underlying asset's risk. Since moneyness modulates these effects, systematic volatility positively (negatively) prices options with high (low) asset-to-strike price ratios, while idiosyncratic volatility is unambiguously priced. Single-stock call option data support our predictions.
Volatility And Expected Option Returns
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Author : Guanglian Hu
language : en
Publisher:
Release Date : 2017
Volatility And Expected Option Returns written by Guanglian Hu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
We analyze the relation between expected option returns and the volatility of the underlying securities. The expected return from holding a call (put) option is a decreasing (increasing) function of the volatility of the underlying. These predictions are strongly supported by the data. In the cross-section of equity option returns, returns on call (put) option portfolios decrease (increase) with underlying stock volatility. This finding is not due to cross-sectional variation in expected stock returns. It holds in various option samples with different maturities and moneyness, and it is robust to alternative measures of underlying volatility and different weighting methods.
Volatility Of Volatility And The Cross Section Of Option Returns
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Author : Xinfeng Ruan
language : en
Publisher:
Release Date : 2019
Volatility Of Volatility And The Cross Section Of Option Returns written by Xinfeng Ruan and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This paper presents a robust new finding that there is a significantly negative relation between the equity option returns and the forward-looking volatility-of-volatility (VOV). After controlling for numerous existing option and stock characteristics, the VOV effect remains significantly negative. It also survives many robustness checks. A conceptual model provided in this paper reveals the pricing mechanism behind the VOV effect, i.e., the negative relation is due to the negative market price of the VOV risk. As investors dislike the VOV risk, they are willing to pay a high premium to hold options on high VOV stocks. The high-low return spread on option portfolios sorted on VOV cannot be explained by standard risk factors, and survives the double sorting on a variety of control variables. This confirms that the VOV effect is economically and statistically significant.
Caught Up In The Higher Moments
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Author : Ronald Jared DeLisle
language : en
Publisher:
Release Date : 2010
Caught Up In The Higher Moments written by Ronald Jared DeLisle and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
ABSTRACT: This dissertation examines if information extracted from the options markets is priced in the cross-section of equity returns and whether or not this information is a systematic risk factor. Several versions of the Intertemporal Capital Asset Pricing Model predict that changes in aggregate volatility are priced into the cross-section of stock returns. Literature confirms that changes in expected future market volatility are priced into the cross-section of stock returns. Several of these studies use the VIX Index as proxy for future market volatility, and suggest that it is a risk factor. However, prior studies do not test whether asymmetric volatility affects if firm sensitivity to changes in VIX is related to risk, or is just a characteristic uniformly affecting all firms. The first chapter of my dissertation examines the asymmetric relation of stock returns and changes in VIX. The study finds that sensitivity to VIX innovations affects returns when volatility is rising, but not when it is falling. When VIX rises this sensitivity is a priced risk factor, but when it falls there is a positive impact on all stocks irrespective of VIX loadings. The second essay of my dissertation uses the second, third, and fourth moments of the risk-neutral density extracted from options on the S & P 500 as the proxy for changes in the expected future market return distribution rather than just the VIX index. The VIX index, while easily obtained, contains limited information due to its construction. The risk-neutral moments map one-to-one to the real-world volatility smile from market options, and contain all the information in the cross-section of market option moneyness and provide a richer proxy for changes in expected future market return distribution. The analyses find that positive change in risk-neutral skewness is a risk-factor and that change in risk-neutral kurtosis is not. The evidence for change in risk-neutral volatility being a risk factor, however, is ambiguous.
Cross Section Of Option Returns And Idiosyncratic Stock Volatility
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Author : Jie Cao
language : en
Publisher:
Release Date : 2016
Cross Section Of Option Returns And Idiosyncratic Stock Volatility written by Jie Cao and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
This paper documents a robust new finding that delta-hedged equity option return decreases monotonically with an increase in the idiosyncratic volatility of the underlying stock. This result can not be explained by standard risk factors. It is distinct from existing anomalies in the stock market or volatility-related option mispricing. It is consistent with market imperfections and constrained financial intermediaries. Dealers charge a higher premium for options on high idiosyncratic volatility stocks due to their higher arbitrage costs. Controlling for limits to arbitrage proxies reduces the strength of the negative relation between delta-hedged option return and idiosyncratic volatility by about 40%.
Volatility Uncertainty And The Cross Section Of Option Returns
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Author : Jie Cao
language : en
Publisher:
Release Date : 2019
Volatility Uncertainty And The Cross Section Of Option Returns written by Jie Cao and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This paper studies the relation between the uncertainty of volatility, measured as the volatility of volatility, and future delta-hedged equity option returns. We find that delta-hedged option returns consistently decrease in uncertainty of volatility. Our results hold for different measures of volatility such as implied volatility, EGARCH volatility from daily returns, and realized volatility from high-frequency data. The results are robust to firm characteristics, stock and option liquidity, volatility characteristics, and jump risks, and are not explained by common risk factors. Our findings suggest that option dealers charge a higher premium for single-name options with high uncertainty of volatility, because these stock options are more difficult to hedge.
Implied And Realized Volatility In The Cross Section Of Equity Options
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Author : Manuel Ammann
language : en
Publisher:
Release Date : 2016
Implied And Realized Volatility In The Cross Section Of Equity Options written by Manuel Ammann and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
Using a complete sample of US equity options, we analyze patterns of implied volatility in the cross-section of equity options with respect to stock characteristics. We find that high-beta stocks, small stocks, stocks with a low-market-to-book ratio, and non-momentum stocks trade at higher implied volatilities after controlling for historical volatility. We find evidence that implied volatility overestimates realized volatility for low-beta stocks, small caps, low-market-to-book stocks, and stocks with no momentum and vice versa. However, we cannot reject the null hypothesis that implied volatility is an unbiased predictor of realized volatility in the cross section.
Implied And Realized Volatility In The Cross Section Of Equity Options
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Author : Manuel Ammann
language : en
Publisher:
Release Date : 2009
Implied And Realized Volatility In The Cross Section Of Equity Options written by Manuel Ammann and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
The Information Content In Implied Idiosyncratic Volatility And The Cross Section Of Stock Returns
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Author : Dean Diavatopoulos
language : en
Publisher:
Release Date : 2014
The Information Content In Implied Idiosyncratic Volatility And The Cross Section Of Stock Returns written by Dean Diavatopoulos and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Current literature is inconclusive as to whether idiosyncratic risk influences future stock returns and the direction of the impact. Prior studies are based on historical realized volatility. Implied volatilities from option prices represent the market's assessment of future risk and are likely a superior measure to historical realized volatility. We use implied idiosyncratic volatilities on firms with traded options to examine the relation between idiosyncratic volatility and future returns. We find a strong positive link between implied idiosyncratic risk and future returns. After considering the impact of implied idiosyncratic volatility, historical realized idiosyncratic volatility is unimportant. This performance is strongly tied to small size and high book-to-market equity firms.
Characteristics And Expected Returns In Individual Equity Options
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Author :
language : en
Publisher:
Release Date : 2014
Characteristics And Expected Returns In Individual Equity Options written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
I study excess returns from selling individual equity options that are leverage-adjusted and delta-hedged. I find that options with longer maturities have higher risk yet lower average returns. I identify three new factors--level, slope, and value--in option returns, which together explain the cross-section of expected returns on option portfolios formed on moneyness, maturity, and value. This three-factor model also helps explain expected returns on option portfolios formed on twelve other characteristics. While the level premium appears to compensate investors for market-wide volatility and jump shocks, market frictions help us understand the slope and value premiums.