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Implied Volatility Risk Premiums
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Book Synopsis Options and the Volatility Risk Premium by : Jared Woodard
Download or read book Options and the Volatility Risk Premium written by Jared Woodard and published by Pearson Education. This book was released on 2011-02-17 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master the new edge in options trades: the hidden volatility risk premium that exists in options for every major asset class. One of the most exciting areas of recent financial research has been the study of how the volatility implied by option prices relates to the volatility exhibited by their underlying assets. Here, I’ll explain the concept of the volatility risk premium, present evidence for its presence in options on every major asset class, and show how to estimate, predict, and trade on it....
Book Synopsis Implied Volatility Risk Premiums by : Bas Peeters
Download or read book Implied Volatility Risk Premiums written by Bas Peeters and published by . This book was released on 2008 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: We incorporate risk premiums for stochastic implied volatility in an arbitrage-free model describing the joint dynamics of options and the security underlying these options. As this model directly describes the implied volatility surface, it also captures dynamics exclusively residing in the option markets. Because an arbitrage-free multi-factor description of this model has yet to be developed, we specify to a stochastic implied volatility model with a single factor determining the dynamics of the implied volatility. Parameters in this model are estimated for several markets, and for the Samp;P 500 the resulting implied volatility risk premium is compared to risk premium estimates from models that describe the instantaneous volatility.
Book Synopsis Risk Premium Effects on Implied Volatility Regressions by : Leonidas Rompolis
Download or read book Risk Premium Effects on Implied Volatility Regressions written by Leonidas Rompolis and published by . This book was released on 2009 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides new insights into the sources of bias of option implied volatility to forecast its physical counterpart. It argues that this bias can be attributed to volatility risk premium effects. The latter are found to depend on high order cumulants of the risk neutral density. These cumulants capture the risk averse behavior of investors in the stock and option markets for bearing the investment risk which is reflected in the deviations of the implied risk neutral distribution from the normal distribution. The paper shows that the bias of the implied volatility to forecast its corresponding physical measure can be eliminated when the implied volatility regressions are adjusted for the risk premium effects. The latter are captured mainly by the third order risk neutral cumulant. The paper also shows that a substantial reduction of higher order risk neutral cumulants biases to predict their corresponding physical ones is supported when adjustments for risk premium effects are made.
Book Synopsis Volatility Risk Premiums Embedded in Individual Equity Options by : Nikunj Kapadia
Download or read book Volatility Risk Premiums Embedded in Individual Equity Options written by Nikunj Kapadia and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The research indicates that index option prices incorporate a negative volatility risk premium, thus providing a possible explanation of why Black-Scholes implied volatilities of index options on average exceed realized volatilities. This examination of the empirical implication of a market volatility risk premium on 25 individual equity options provides some new insights.While the Black-Scholes implied volatilities from individual equity options are also greater on average than historical return volatilities, the difference between them is much smaller than for the market index. Like index options, individual equity option prices embed a negative market volatility risk premium, although much smaller than for the index option - and idiosyncratic volatility does not appear to be priced.These empirical results provide a potential explanation of why buyers of individual equity options leave less money on the table than buyers of index options.
Book Synopsis Forecast Performance of Implied Volatility and the Impact of the Volatility Risk Premium by : Ralf Becker
Download or read book Forecast Performance of Implied Volatility and the Impact of the Volatility Risk Premium written by Ralf Becker and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-implied and Realized Volatilities by : Tim Bollerslev
Download or read book Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-implied and Realized Volatilities written by Tim Bollerslev and published by . This book was released on 2004 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment suggests that the procedure works well in practice. Implementing the procedure with actual S&P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities results in significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns"--Abstract.
Book Synopsis Analyzing Volatility Risk and Risk Premium in Option Contracts by : Peter Carr
Download or read book Analyzing Volatility Risk and Risk Premium in Option Contracts written by Peter Carr and published by . This book was released on 2017 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we show that just like option implied volatilities, realized and expected volatilities can also be constructed specific to, and different across, option contracts. Applying the new theory to the S&P 500 index time series and options data, we extract volatility risk and risk premium from the volatility surfaces, and find that the extracted risk premium significantly predicts future stock returns.
Book Synopsis Option Implied Volatility Risks by : Hendrik Hülsbusch
Download or read book Option Implied Volatility Risks written by Hendrik Hülsbusch and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Implied Volatilities as Forecasts of Future Volatility, Time-Varying Risk Premia, and Returns Variability by : Mikhail Chernov
Download or read book Implied Volatilities as Forecasts of Future Volatility, Time-Varying Risk Premia, and Returns Variability written by Mikhail Chernov and published by . This book was released on 2002 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The unbiasedness tests of implied volatility as a forecast of future realized volatility have found implied volatility to be a biased predictor. We explain this puzzle by recognizing that option prices contain a market risk premium not only on the asset itself, but also on its volatility. Hull and White (1987) show using a stochastic volatility model that a call option price can be represented as an expected value of the Black-Scholes formula evaluated at the average integrated volatility. If we allow volatility risk to be priced, this expectation should be taken under the risk-neutral probability measure, and can be decomposed into the expectation with respect to the physical measure and the risk-premium term. This term is just a linear function of the unobservable spot volatility. The decomposition explains the bias documented in the empirical literature and shows that the realized and historical volatility, which are used in the tests, are in fact the estimates of the unobserved quadratic variation and spot volatility of the stock-return generating process. Therefore, the use of these estimates generates the error-in-the-variables problem. We generalize the above results from a stochastic volatility model to a model with multiple volatility and jump factors. We provide an empirical illustration based on two US equity indices and three foreign currency rates. We find, that when we take into an account the risk-premium and use efficient methods to estimate volatility, the unbiasedness hypothesis can not be rejected, and the point estimate of the loading on the implied volatility in the traditional regression is equal to 1.
Book Synopsis The Importance of the Volatility Risk Premium for Volatility Forecasting by : Marcel Prokopczuk
Download or read book The Importance of the Volatility Risk Premium for Volatility Forecasting written by Marcel Prokopczuk and published by . This book was released on 2014 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.
Book Synopsis Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities by : Tim Bollerslev
Download or read book Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities written by Tim Bollerslev and published by . This book was released on 2009 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment confirms that the procedure works well in practice. Implementing the procedure with actual Samp;P 500 option-implied volatilities and high-frequency five-minute-based realized volatilities indicates significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns.
Book Synopsis Equity Risk Premium and Volatility by : Yonggan Zhao
Download or read book Equity Risk Premium and Volatility written by Yonggan Zhao and published by . This book was released on 2009 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the relation between stock market returns and volatility using a bivariate factor model governing the evolution of a volatility indicator and the market price of risk. The model-implied volatility measured by the conditional standard deviation of equity returns is compared with the predictable volatility measured by the expected value of the selected volatility indicator. Using the Standard and Poor's Composite Return Index and three volatility indicators (the VIX, the standard deviation of historical returns, and a GARCH(1,1)-fitted indicator), we study a predictive model with a set of the selected market state variables, such as past excess stock returns, current indicated volatility level, aggregate dividend yield, changes in the aggregate consumption, changes in the production output, and stock earnings. The daily risk premiums follow similar patterns for the three volatility indicators with the GARCH(1,1) indicator providing the most consistent predictability. While a positive relation between the intertemporal risk premium and volatility is plausible, the correlations between unexpected returns and volatility indicators are mixed with different volatility indicators. For the selected sample data, we find both strong leverage and volatility feedback effects. Finally, we discuss a portfolio strategy to show the predictive power of the model.
Book Synopsis Semiparametric Modeling of Implied Volatility by : Matthias R. Fengler
Download or read book Semiparametric Modeling of Implied Volatility written by Matthias R. Fengler and published by Springer Science & Business Media. This book was released on 2005-12-19 with total page 232 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book offers recent advances in the theory of implied volatility and refined semiparametric estimation strategies and dimension reduction methods for functional surfaces. The first part is devoted to smile-consistent pricing approaches. The second part covers estimation techniques that are natural candidates to meet the challenges in implied volatility surfaces. Empirical investigations, simulations, and pictures illustrate the concepts.
Author :Ryszard Kokoszczynski Publisher :Peter Lang Gmbh, Internationaler Verlag Der Wissenschaften ISBN 13 :9783631655764 Total Pages :0 pages Book Rating :4.6/5 (557 download)
Book Synopsis Volatility as an Asset Class by : Ryszard Kokoszczynski
Download or read book Volatility as an Asset Class written by Ryszard Kokoszczynski and published by Peter Lang Gmbh, Internationaler Verlag Der Wissenschaften. This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volatility derivatives are today an important group of financial instruments. This book presents an overview of their major classes and their possible applications in investment strategies and portfolio optimization. Volatility is not constant so the book presents its term structure and its potential use in forecasting volatility.
Book Synopsis Volatility Risk Premia and Exchange Rate Predictability by : Pasquale Della Corte
Download or read book Volatility Risk Premia and Exchange Rate Predictability written by Pasquale Della Corte and published by . This book was released on 2015 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: We discover a new currency strategy with highly desirable return and diversification properties, which uses the predictive capability of currency volatility risk premia for currency returns. The volatility risk premium -- the difference between expected realized volatility and model-free implied volatility -- reflects the costs of insuring against currency volatility fluctuations, and the strategy sells high-insurance-cost currencies and buys low-insurance-cost currencies. The returns to the strategy are mainly generated by movements in spot exchange rates rather than interest rate differentials, and the strategy carries a large weight in a minimum-variance portfolio of commonly employed currency strategies. We explore alternative explanations for the profitability of the strategy, which cannot be understood using traditional risk factors.
Book Synopsis General Equilibrium Option Pricing Method: Theoretical and Empirical Study by : Jian Chen
Download or read book General Equilibrium Option Pricing Method: Theoretical and Empirical Study written by Jian Chen and published by Springer. This book was released on 2018-04-10 with total page 163 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book mainly addresses the general equilibrium asset pricing method in two aspects: option pricing and variance risk premium. First, volatility smile and smirk is the famous puzzle in option pricing. Different from no arbitrage method, this book applies the general equilibrium approach in explaining the puzzle. In the presence of jump, investors impose more weights on the jump risk than the volatility risk, and as a result, investors require more jump risk premium which generates a pronounced volatility smirk. Second, based on the general equilibrium framework, this book proposes variance risk premium and empirically tests its predictive power for international stock market returns.
Book Synopsis The Risk Premium Factor by : Stephen D. Hassett
Download or read book The Risk Premium Factor written by Stephen D. Hassett and published by John Wiley & Sons. This book was released on 2011-08-31 with total page 210 pages. Available in PDF, EPUB and Kindle. Book excerpt: A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century. Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory. Explains stock prices from 1960 through the present including the 2008/09 "market meltdown" Shows how the S&P 500 has consistently reverted to values predicted by the model Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.
