Risk Adjusted Option Implied Moments

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Risk Adjusted Option Implied Moments

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Author : Felix Brinkmann
language : en
Publisher:
Release Date : 2016

Risk Adjusted Option Implied Moments written by Felix Brinkmann 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.

Option-implied moments, like implied volatility, contain useful information about an underlying asset's return distribution but are derived under the risk-neutral probability measure. This paper provides a direct way of converting risk-neutral moments into the corresponding physical moments, which are required for many applications. The main result is a representation of physical moments in terms of observed option prices and a representative investor's preferences. As an empirical application of this result, we provide implied estimates of the representative stock market investor's disappointment aversion using S&P 500 index option prices. We find that disappointment aversion has a procyclical pattern. It is high in times of high index levels and declines when the index falls. We confirm the view that investors with high risk aversion and disappointment aversion leave the stock market during times of turbulence and reenter it after a period of high returns.

Option Implied Moments And Risk Aversion

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Author : Flavio Nardi
language : en
Publisher:
Release Date : 2018

Option Implied Moments And Risk Aversion written by Flavio Nardi 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.

In this paper I provide empirical evidence that index options implied higher moments can predict the index returns and Sharpe ratio. Specifically, I present a method to recover option implied subjective moments of the S &P500 index under the assumption of no arbitrage and logarithmic utility. Using index options prices and return data, I test the logarithmic utility assumption and obtain risk aversion estimates not statistically different from one at investment horizons of three to nine months. Under logarithmic utility, I show that the recovered subjective variance has forecasting power controlling for past realized variance. Interestingly, the risk neutral variance is larger than the subjective variance over the entire sample, an empirical fact that quantifies the implied variance premium for a log utility investor. Lastly, I also find that the forward looking Sharpe ratio implied by option prices has forecasting power; this finding can be adopted as a risk--adjusted market timing indicator to improve the return performance of either a passive indexing or a diversified portfolio investment strategy. For example, as a long term investor would rebalance their portfolio periodically to optimize or maintain their asset allocation targets (see for example, cite{ang2014asset}), they could use the option implied Sharpe ratio as a ``gauge'' of the overall market { it price level}. As such, they could take advantage of periods where there is a particularly high expected Sharpe ratio on the market to buy more of the market index when it is at lower valuation levels. Thus, this gauge serves as a reinforcing mechanism to buy low and sell high for periodic portfolio rebalancing.

The Information Content Of Option Implied Tail Risk On Post Earnings Abnormal Stock Returns

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Author : Mengxi (Maggie) Liu
language : en
Publisher:
Release Date : 2018

The Information Content Of Option Implied Tail Risk On Post Earnings Abnormal Stock Returns written by Mengxi (Maggie) Liu 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 show that option-implied jump tail risk estimated prior to earnings announcements strongly predicts post-earnings risk-adjusted abnormal stock returns. The predictive power of implied jump tail risk is particularly strong on extreme abnormal stock returns whose absolute values exceed 10%. The finding is robust to various event windows and after controlling for model-free implied moments of variance, skewness and kurtosis. We argue that the tail risk implied from options preceding earnings news releases reflects a sudden flood of information of informed traders and investors, and this results in the tail risk usefully predicting abnormal stock returns. Finally, we show that upside and downside tail risk contain distinctive predictive information, with upside (downside) tail risk strongly predicting positive (negative) abnormal stock returns.

Option Implied Risk Neutral Distributions And Risk Aversion

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Author : Jens Carsten Jackwerth
language : en
Publisher:
Release Date : 2008

Option Implied Risk Neutral Distributions And Risk Aversion written by Jens Carsten Jackwerth and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.

Explaining The Performance Of Index Option Put Write Strategies

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Author : Angelo Boutalikakis
language : en
Publisher:
Release Date : 2017

Explaining The Performance Of Index Option Put Write Strategies written by Angelo Boutalikakis 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.

The returns from selling put options are often regarded as excessive and highly nonlinear in the movements of the underlying security. This work investigates these claims based on a range of simple strategies for S & P 500 options clustered along maturity, moneyness, and roll frequency using a self-developed computational simulation. The risk-adjusted performance does not support the hypothesis of overpriced puts. By investigating the results through multifactor models, I find evidence indicating that conventional models can explain the returns after all. Especially noteworthy is that correlations with bad states of the market, downside betas, strip the explanatory power of correlations with good states of the market in a joint model. Also, the performance depends on a long reroll cycle to avoid transaction cost, and seems to be more successful for in-the-money options. Through further predictive regressions on option-implied moments, I determine that it is hard to predict the success of the strategy despite a significant negative relationship between option-implied volatility and contemporaneous as well as future returns. The results provide potentially tradeable information for finance professionals and suggest consecutive studies in enhanced scope and scale, e.g., for other models or indices.

Option Implied Equity Risk And The Cross Section Of Stock Returns

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Author : Te-Feng Chen
language : en
Publisher:
Release Date : 2016

Option Implied Equity Risk And The Cross Section Of Stock Returns written by Te-Feng Chen 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 forward-looking information in the options market, we introduce a new method for better identifying systematic market risk as a predictor for the cross-section of stock returns. Empirical results show that there is a significantly positive relation between our option-implied beta and subsequent stock returns, in which a long-short portfolio formed on the option-implied beta generates an average monthly risk-adjusted return of 0.96%. In support of its economic significance, we further find that our option-implied beta significantly predicts the future realized betas and that the associated risk premium is a strong predictor of future market returns.

Option Implied Volatility Measures And Stock Return Predictability

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Author : Fu, Xi
language : en
Publisher:
Release Date : 2019

Option Implied Volatility Measures And Stock Return Predictability written by Fu, Xi 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.

Using firm-level option and stock data, we examine the predictive ability of option-implied volatility measures proposed by previous studies and recommend the best measure using up-to-date data. Portfolio level analysis implies significant non-zero risk-adjusted returns on arbitrage portfolios formed on the call-put implied volatility spread, implied volatility skew, and realized-implied volatility spread. Firm-level cross-sectional regressions show that, the implied volatility skew has the most significant predictive power over various investment horizons. The predictive power persists before and after the 2008 Global Financial Crisis.

Measuring Systemic Risk Adjusted Liquidity Srl

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Author : Andreas Jobst
language : en
Publisher: International Monetary Fund
Release Date : 2012-08-01

Measuring Systemic Risk Adjusted Liquidity Srl written by Andreas Jobst and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-08-01 with Business & Economics categories.

Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Implied Volatility Functions

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Author : Bernard Dumas
language : en
Publisher:
Release Date : 1996

Implied Volatility Functions written by Bernard Dumas and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1996 with Options (Finance) categories.

Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.

Systemic Contingent Claims Analysis

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Author : Mr.Andreas A. Jobst
language : en
Publisher: International Monetary Fund
Release Date : 2013-02-27

Systemic Contingent Claims Analysis written by Mr.Andreas A. Jobst and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-02-27 with Business & Economics categories.

The recent global financial crisis has forced a re-examination of risk transmission in the financial sector and how it affects financial stability. Current macroprudential policy and surveillance (MPS) efforts are aimed establishing a regulatory framework that helps mitigate the risk from systemic linkages with a view towards enhancing the resilience of the financial sector. This paper presents a forward-looking framework ("Systemic CCA") to measure systemic solvency risk based on market-implied expected losses of financial institutions with practical applications for the financial sector risk management and the system-wide capital assessment in top-down stress testing. The suggested approach uses advanced contingent claims analysis (CCA) to generate aggregate estimates of the joint default risk of multiple institutions as a conditional tail expectation using multivariate extreme value theory (EVT). In addition, the framework also helps quantify the individual contributions to systemic risk and contingent liabilities of the financial sector during times of stress.