Risk Adjusted Option Implied Moments

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Risk-Adjusted Option-Implied Moments

Author : Felix Brinkmann
Publisher :
ISBN 13 :
Total Pages : 35 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Risk-Adjusted Option-Implied Moments by : Felix Brinkmann

Download or read book Risk-Adjusted Option-Implied Moments written by Felix Brinkmann and published by . This book was released on 2016 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author : Flavio Nardi
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Option Implied Moments and Risk Aversion by : Flavio Nardi

Download or read book Option Implied Moments and Risk Aversion written by Flavio Nardi and published by . This book was released on 2018 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Option-Implied Risk-Neutral Distributions and Risk Aversion

Author : Jens Carsten Jackwerth
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (95 download)

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Book Synopsis Option-Implied Risk-Neutral Distributions and Risk Aversion by : Jens Carsten Jackwerth

Download or read book Option-Implied Risk-Neutral Distributions and Risk Aversion written by Jens Carsten Jackwerth and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Option-Implied Equity Risk and the Cross-Section of Stock Returns

Author : Te-Feng Chen
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Option-Implied Equity Risk and the Cross-Section of Stock Returns by : Te-Feng Chen

Download or read book Option-Implied Equity Risk and the Cross-Section of Stock Returns written by Te-Feng Chen and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Explaining the Performance of Index Option Put-Write Strategies

Author : Angelo Boutalikakis
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (1 download)

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Book Synopsis Explaining the Performance of Index Option Put-Write Strategies by : Angelo Boutalikakis

Download or read book Explaining the Performance of Index Option Put-Write Strategies written by Angelo Boutalikakis and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 Volatility Measures and Stock Return Predictability

Author : Fu, Xi
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Option-Implied Volatility Measures and Stock Return Predictability by : Fu, Xi

Download or read book Option-Implied Volatility Measures and Stock Return Predictability written by Fu, Xi and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Trading Volatility

Author : Colin Bennett
Publisher :
ISBN 13 : 9781461108757
Total Pages : 316 pages
Book Rating : 4.1/5 (87 download)

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Book Synopsis Trading Volatility by : Colin Bennett

Download or read book Trading Volatility written by Colin Bennett and published by . This book was released on 2014-08-17 with total page 316 pages. Available in PDF, EPUB and Kindle. Book excerpt: This publication aims to fill the void between books providing an introduction to derivatives, and advanced books whose target audience are members of quantitative modelling community. In order to appeal to the widest audience, this publication tries to assume the least amount of prior knowledge. The content quickly moves onto more advanced subjects in order to concentrate on more practical and advanced topics. "A master piece to learn in a nutshell all the essentials about volatility with a practical and lively approach. A must read!" Carole Bernard, Equity Derivatives Specialist at Bloomberg "This book could be seen as the 'volatility bible'!" Markus-Alexander Flesch, Head of Sales & Marketing at Eurex "I highly recommend this book both for those new to the equity derivatives business, and for more advanced readers. The balance between theory and practice is struck At-The-Money" Paul Stephens, Head of Institutional Marketing at CBOE "One of the best resources out there for the volatility community" Paul Britton, CEO and Founder of Capstone Investment Advisors "Colin has managed to convey often complex derivative and volatility concepts with an admirable simplicity, a welcome change from the all-too-dense tomes one usually finds on the subject" Edmund Shing PhD, former Proprietary Trader at BNP Paribas "In a crowded space, Colin has supplied a useful and concise guide" Gary Delany, Director Europe at the Options Industry Council

Measuring Systemic Risk-Adjusted Liquidity (SRL)

Author : Andreas Jobst
Publisher : International Monetary Fund
ISBN 13 : 1475505590
Total Pages : 70 pages
Book Rating : 4.4/5 (755 download)

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Book Synopsis Measuring Systemic Risk-Adjusted Liquidity (SRL) by : Andreas Jobst

Download or read book Measuring Systemic Risk-Adjusted Liquidity (SRL) written by Andreas Jobst and published by International Monetary Fund. This book was released on 2012-08-01 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Responsible Investing

Author : Matthew W. Sherwood
Publisher : Routledge
ISBN 13 : 1351361910
Total Pages : 319 pages
Book Rating : 4.3/5 (513 download)

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Book Synopsis Responsible Investing by : Matthew W. Sherwood

Download or read book Responsible Investing written by Matthew W. Sherwood and published by Routledge. This book was released on 2018-09-21 with total page 319 pages. Available in PDF, EPUB and Kindle. Book excerpt: This textbook provides the first holistic resource on Environmental, Social, and Governance (ESG) investing for undergraduate and graduate programs. It provides a thorough background and history of ESG investing, as well as cutting-edge industry developments, in a way that introduces the reader to the rapidly developing field of responsible investing. Beginning with a comprehensive background of ESG investing and the development of models measuring risk and return, the book then discusses the development of ESG risks, and provides an overview of ESG rating systems. The textbook also outlines the current position of ESG investing in portfolio management through granular analysis, provides insight into common investor concerns about ESG investments, discloses qualitative theories relevant to ESG investing, and reviews literature attempting to model ESG investment performance. Finally, the authors provide readers with a foundation on the development of financial models measuring risk and return, which will be useful for measuring the performance of ESG investments. With case studies from contributors around the world, this textbook is the first of its kind to truly provide a compelling blend of quantitative and qualitative analysis supporting the incorporation of ESG investment strategies into investment portfolios. Offering an excellent overview of the growing trends in ESG investing, as well as a close analysis of ESG theories and their practical application both today and in the future, this book will be a great resource for both undergraduates and graduate students.

Option-implied Betas, Moment Risk Premia and Stock Returns

Author : Fang Qiao
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (118 download)

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Book Synopsis Option-implied Betas, Moment Risk Premia and Stock Returns by : Fang Qiao

Download or read book Option-implied Betas, Moment Risk Premia and Stock Returns written by Fang Qiao and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Analysis of Option Returns in Perfect and Imperfect Markets

Author : David Salazar Volkmann
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (118 download)

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Book Synopsis Analysis of Option Returns in Perfect and Imperfect Markets by : David Salazar Volkmann

Download or read book Analysis of Option Returns in Perfect and Imperfect Markets written by David Salazar Volkmann and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The thesis studies index and equity option returns in perfect and imperfect markets to explain parts of the option mispricing puzzle. Perfect markets exist under informational efficiency, market completeness and frictionless trading. The thesis shows that an option-implied risk-adjusted approach and the standard Black-Scholes model are consistent with empirical mean and volatility of S&P500 put returns and ITM call returns, but not OTM call returns. Imperfect markets exist under market frictions which allow arbitrage-free deviations of option prices from fair value resulting in option retur...

Dispersion of Option-implied Risk Measures

Author : Iwan Lottenbach
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (953 download)

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Book Synopsis Dispersion of Option-implied Risk Measures by : Iwan Lottenbach

Download or read book Dispersion of Option-implied Risk Measures written by Iwan Lottenbach and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The thesis at hand investigates the risk and predictive value of dispersions computed over option-implied risk measures of individual stocks. The option-implied risk measure calculation rests upon the risk-neutral arbitrage pricing theory and does not assume an underlying pricing model such as Black & Scholes (1973). The analysis relies on a large individual stock and option data panel based on the S&P 500 equity index with observations from January 2000 to December 2012. While Fama & McBeth (1973) regressions - based on 16 risk-neural volatility and skewness ranked portfolios - reveal no statistically significant risk premium for dispersions of option-implied risk measures, the latter factors have a remarkable predictive power for S&P 500 index returns in three months. A mean normalized standard deviation dispersion of risk-neutral volatility (skewness) thereby induces a monthly index return of approximately 13% (3%) in three month. The adjusted R2 of approximately 2% is, furthermore, a considerably good result for a predictive return model. The thesis at hand on dispersion of option-implied risk measures motivates some further research in this field, as the potential of forecasting index returns has gained confidence.

Systemic Contingent Claims Analysis

Author : Mr.Andreas A. Jobst
Publisher : International Monetary Fund
ISBN 13 : 1475557531
Total Pages : 93 pages
Book Rating : 4.4/5 (755 download)

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Book Synopsis Systemic Contingent Claims Analysis by : Mr.Andreas A. Jobst

Download or read book Systemic Contingent Claims Analysis written by Mr.Andreas A. Jobst and published by International Monetary Fund. This book was released on 2013-02-27 with total page 93 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Risk-Based and Factor Investing

Author : Emmanuel Jurczenko
Publisher : Elsevier
ISBN 13 : 0081008112
Total Pages : 488 pages
Book Rating : 4.0/5 (81 download)

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Book Synopsis Risk-Based and Factor Investing by : Emmanuel Jurczenko

Download or read book Risk-Based and Factor Investing written by Emmanuel Jurczenko and published by Elsevier. This book was released on 2015-11-24 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a compilation of recent articles written by leading academics and practitioners in the area of risk-based and factor investing (RBFI). The articles are intended to introduce readers to some of the latest, cutting edge research encountered by academics and professionals dealing with RBFI solutions. Together the authors detail both alternative non-return based portfolio construction techniques and investing style risk premia strategies. Each chapter deals with new methods of building strategic and tactical risk-based portfolios, constructing and combining systematic factor strategies and assessing the related rules-based investment performances. This book can assist portfolio managers, asset owners, consultants, academics and students who wish to further their understanding of the science and art of risk-based and factor investing. Contains up-to-date research from the areas of RBFI Features contributions from leading academics and practitioners in this field Features discussions of new methods of building strategic and tactical risk-based portfolios for practitioners, academics and students

Volatility Trading, + website

Author : Euan Sinclair
Publisher : John Wiley & Sons
ISBN 13 : 0470181990
Total Pages : 228 pages
Book Rating : 4.4/5 (71 download)

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Book Synopsis Volatility Trading, + website by : Euan Sinclair

Download or read book Volatility Trading, + website written by Euan Sinclair and published by John Wiley & Sons. This book was released on 2008-06-23 with total page 228 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in order to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach. He guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often-overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of-and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader. Your goal, Sinclair explains, must be clearly defined and easily expressed-if you cannot explain it in one sentence, you probably aren't completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn't trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals. As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD-ROM, will provide that knowledge. The CD-ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.

Option Pricing Models and Volatility Using Excel-VBA

Author : Fabrice D. Rouah
Publisher : John Wiley & Sons
ISBN 13 : 1118429206
Total Pages : 456 pages
Book Rating : 4.1/5 (184 download)

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Book Synopsis Option Pricing Models and Volatility Using Excel-VBA by : Fabrice D. Rouah

Download or read book Option Pricing Models and Volatility Using Excel-VBA written by Fabrice D. Rouah and published by John Wiley & Sons. This book was released on 2012-06-15 with total page 456 pages. Available in PDF, EPUB and Kindle. Book excerpt: This comprehensive guide offers traders, quants, and students the tools and techniques for using advanced models for pricing options. The accompanying website includes data files, such as options prices, stock prices, or index prices, as well as all of the codes needed to use the option and volatility models described in the book. Praise for Option Pricing Models & Volatility Using Excel-VBA "Excel is already a great pedagogical tool for teaching option valuation and risk management. But the VBA routines in this book elevate Excel to an industrial-strength financial engineering toolbox. I have no doubt that it will become hugely successful as a reference for option traders and risk managers." —Peter Christoffersen, Associate Professor of Finance, Desautels Faculty of Management, McGill University "This book is filled with methodology and techniques on how to implement option pricing and volatility models in VBA. The book takes an in-depth look into how to implement the Heston and Heston and Nandi models and includes an entire chapter on parameter estimation, but this is just the tip of the iceberg. Everyone interested in derivatives should have this book in their personal library." —Espen Gaarder Haug, option trader, philosopher, and author of Derivatives Models on Models "I am impressed. This is an important book because it is the first book to cover the modern generation of option models, including stochastic volatility and GARCH." —Steven L. Heston, Assistant Professor of Finance, R.H. Smith School of Business, University of Maryland

Implied Volatility Functions

Author : Bernard Dumas
Publisher :
ISBN 13 :
Total Pages : 34 pages
Book Rating : 4.:/5 (258 download)

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Book Synopsis Implied Volatility Functions by : Bernard Dumas

Download or read book Implied Volatility Functions written by Bernard Dumas and published by . This book was released on 1996 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.