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Risk Neutral Skewness
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Book Synopsis An Analysis of the Information Content Of, and the Risk-Neutral Skewness Implict In, U.S. Individual Stock Options by : Yuanyuan Zhang
Download or read book An Analysis of the Information Content Of, and the Risk-Neutral Skewness Implict In, U.S. Individual Stock Options written by Yuanyuan Zhang and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Information Content of the Term Structure of Risk-Neutral Skewness by : Paul Borochin
Download or read book The Information Content of the Term Structure of Risk-Neutral Skewness written by Paul Borochin and published by . This book was released on 2018 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We seek to reconcile the debate about the price effect of risk-neutral skewness (RNS) on stocks. We document positive predictability from short-term skewness, consistent with informed-trading demand, and negative predictability from long-term skewness, consistent with skewness preference. A term spread on RNS captures different information from long- and short-term contracts, resulting in stronger predictability. The quintile portfolio with the lowest spread outperforms that with highest spread by 14.64% annually. The term structure of RNS predicts earnings surprises and price crashes. The information difference between short- and long-term options explains the pricing difference of their RNS, providing a potential resolution to the debate.
Book Synopsis Risk-Neutral Skewness by : Zahid Rehman
Download or read book Risk-Neutral Skewness written by Zahid Rehman and published by . This book was released on 2012 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using data on individual stock options, we show that the currently observed option-implied ex ante skewness is positively related to future stock returns. This contrasts with the existing evidence that uses historical stock or option data to estimate skewness and finds a negative skewness-return relation. We proxy for the ex ante skewness by using the model-free implied skewness (MFIS) and show that high MFIS stocks outperform low MFIS stocks by 45 basis points per month after correcting for systematic exposure. We find that the positive MFIS-return relation stems from the ability of the current MFIS to identify the deviation of a firm's value from its fundamental value, and the most overvalued stocks have the most negative ex ante skewness. We further find that the speed of the value correction process depends on the arbitrage risk faced by arbitrageurs trying to exploit the observed inefficiencies. Our results have implications for the segmentation of equity and options markets as well as for limits of arbitrage in equity markets.
Book Synopsis What Does Risk-Neutral Skewness Tell Us About Future Stock Returns? by : Przemyslaw Stan Stilger
Download or read book What Does Risk-Neutral Skewness Tell Us About Future Stock Returns? written by Przemyslaw Stan Stilger and published by . This book was released on 2016 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study documents a positive relationship between the option-implied risk-neutral skewness (RNS) of individual stock returns' distribution and future realized stock returns during the period 1996-2012. A strategy that is long the quintile portfolio with the highest RNS stocks and short the quintile portfolio with the lowest RNS stocks yields an average Fama-French-Carhart alpha of 55 bps per month (t-stat: 2.47). The significant underperformance of the portfolio with the most negative RNS stocks is driven by those stocks that are also perceived as relatively overpriced according to a series of overvaluation proxies and are too costly or too risky to sell short, thereby hindering the price correction mechanism. Our findings indicate that a highly negative RNS value, when reflecting high hedging demand for options by investors who perceive the underlying stock as relatively overpriced but hard to sell short, is a robust signal of significant future stock underperformance.
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:
Book Synopsis The Equity Premium and The Volatility Spread by : Bruno Feunou
Download or read book The Equity Premium and The Volatility Spread written by Bruno Feunou and published by . This book was released on 2016 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk premium and of skewness. In fact, the equity premium is twice the ratio of the volatility spread to skewness. We measure skewness from option prices and test these predictions. We find that conditioning on skewness increases the predictive power of the volatility spread and that coefficient estimates accord with theory. In short, the data do not reject the model's implications for the equity premium. We also check the model's implications for option pricing and show that the information content of skewness leads to improved in-sample and out-of-sample pricing performances as well as improved hedging performances. Our results imply that expanding around the Gaussian density is restrictive and does not offer sufficient flexibility to match the skewness and kurtosis implicit in option data. Finally, we document the term structure of option-implied volatility, skewness and kurtosis and find that time-dependence in returns has a greater impact on skewness.
Book Synopsis Equity Premium and the Volatility Spread: The Role of Risk-Neutral Skewness. June 2009 by : Bank of Canada
Download or read book Equity Premium and the Volatility Spread: The Role of Risk-Neutral Skewness. June 2009 written by Bank of Canada and published by . This book was released on 2009 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options by : Gurdip Bakshi
Download or read book Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options written by Gurdip Bakshi and published by . This book was released on 2001 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index, and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This paper explains the presence and evolution of risk-neutral skewness over time and in the cross-section of individual stocks.
Book Synopsis The Risk-Neutral Distribution of Option Returns by : Turan G. Bali
Download or read book The Risk-Neutral Distribution of Option Returns written by Turan G. Bali and published by . This book was released on 2017 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the first study on the risk-neutral distribution of option returns. We derive solutions for the risk-neutral variance, skewness, and kurtosis of call and put option returns and document several properties of these ex-ante moments. We find that the volatility, skewness, and kurtosis of both call and put returns are higher (lower) for options that are further out-of-the-money (in-the-money). The risk-neutral moments of call returns are increasing in the volatility of the underlying security, while the opposite is true for put returns. Call return moments have strong negative time-series correlation with put return moments. We find that the magnitudes of the risk-neutral and physical moments differ substantially, indicating significant option volatility, skewness, and kurtosis risk premia. The option volatility risk premium is significantly higher than the stock volatility risk premium.
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.
Book Synopsis Information Content of S&P 500 Risk-neutral Skewness and VIX Futures for S&P 500 Volatility Forecasting:Markov Switching Approach by : Yu Jie Huang
Download or read book Information Content of S&P 500 Risk-neutral Skewness and VIX Futures for S&P 500 Volatility Forecasting:Markov Switching Approach written by Yu Jie Huang and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Skewness Risk Premium by : Thorsten Lehnert
Download or read book Skewness Risk Premium written by Thorsten Lehnert and published by . This book was released on 2013 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Inside Volatility Arbitrage by : Alireza Javaheri
Download or read book Inside Volatility Arbitrage written by Alireza Javaheri and published by John Wiley & Sons. This book was released on 2011-08-24 with total page 222 pages. Available in PDF, EPUB and Kindle. Book excerpt: Today?s traders want to know when volatility is a sign that the sky is falling (and they should stay out of the market), and when it is a sign of a possible trading opportunity. Inside Volatility Arbitrage can help them do this. Author and financial expert Alireza Javaheri uses the classic approach to evaluating volatility -- time series and financial econometrics -- in a way that he believes is superior to methods presently used by market participants. He also suggests that there may be "skewness" trading opportunities that can be used to trade the markets more profitably. Filled with in-depth insight and expert advice, Inside Volatility Arbitrage will help traders discover when "skewness" may present valuable trading opportunities as well as why it can be so profitable.
Book Synopsis Caught Up in the (Higher) Moments by : Ronald Jared DeLisle
Download or read book Caught Up in the (Higher) Moments written by Ronald Jared DeLisle and published by . This book was released on 2010 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Risk-Neutral Coskewness and Credit Default Swap Spreads by : Franziska Kurtz
Download or read book Risk-Neutral Coskewness and Credit Default Swap Spreads written by Franziska Kurtz and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: A recent strand in the literature has investigated the effect of the implied volatility smile and the skewness of the implied distribution on credit default swap (CDS) premia. Using a sample of North American firms, this thesis finds a negative relation between the risk-neutral skewness metric of Bakshi, Kapadia, and Madan (2003) and CDS spreads. However, the relationship becomes positive during the financial crisis. A possible explanation for the reversal is based on the "limits to arbitrage" theory. Furthermore, this thesis investigates the impact of risk-neutral coskewness on CDS spreads. The results of a Fama-MacBeth procedure show that the coefficient of risk-neutral coskewness is negative for the period before the financial crisis. The result is robust to controlling for several firm-specific variables. However, a double-sorting reveals that the impact is only negative for firms with lower ratings.
Book Synopsis Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns by : Ryan Ratcliff
Download or read book Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns written by Ryan Ratcliff and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article uses Bates's (1991) measure of the relative prices of out-of-the-money S&P 500 Index options as a measure of risk-neutral (RN) skewness, and shows that it is a statistically significant predictor of the next day's S&P 500 return across a number of specifications. A typical stochastic volatility with jumps pricing model is unable to match many of the observed behaviors of this measure of RN skewness, or the small predictable component of returns. Although volatility and time-to-maturity explain most of the variation in RN skewness in such models, empirically, the predictive power of RN skewness comes from the variation unexplained by these factors.
Book Synopsis The Financial Crisis and the Behavior of S&P 500 Index Option Prices by : Mo Chaudhury
Download or read book The Financial Crisis and the Behavior of S&P 500 Index Option Prices written by Mo Chaudhury and published by . This book was released on 2015 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Stronger volatility skew and smile effects accompanied by a risk-neutral distribution that is closer to the Normal seem unconventional at first thought. But that is what we find during the financial crisis, with the unconventionally high risk-neutral volatility level playing a major role. Additionally, the term structure of implied volatility became inverted (negatively sloped) during the crisis, driven by the inversion of the term structure of risk-neutral volatility and by the rise in the shorter term unconditional volatility. The term structures of risk-neutral skewness and kurtosis appear relatively flat with only negligible change during the crisis. The scale and its term structure rather than the shape factors of the unconditional risk neutral distribution to maturity thus appear more important for the structure of crisis time option prices.
