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Variance And Skew Risk Premiums For The Volatility Market
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Book Synopsis Variance and Skew Risk Premiums for the Volatility Market by : José Da Fonseca
Download or read book Variance and Skew Risk Premiums for the Volatility Market written by José Da Fonseca and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extract variance and skew risk premiums from volatility derivatives in a model-free way and analyze their relationships along with volatility index and equity index returns. These risk premiums can be synthesized through option trading strategies. Using a time series of option prices on the VIX, the most liquid volatility derivative market, we find that variance swap excess return can be partially explained by volatility index and equity index excess returns while these latter variables carry little information for the skew swap excess return. The results sharply contrast with those obtained for the equity index option market underlining very specific characteristics of the volatility derivative market.
Book Synopsis The Skew Risk Premium in the Equity Index Market by : Roman Kozhan
Download or read book The Skew Risk Premium in the Equity Index Market written by Roman Kozhan and published by . This book was released on 2019 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between the skew in implied volatility and realized skew. Like the variance swap, the skew swap corresponds to a trading strategy, necessary to assess risk premia in a model-free way. We find that almost half of the implied volatility skew can be explained by the skew risk premium. We provide evidence that skew and variance premia are manifestations of the same underlying risk factor in the sense that strategies designed to exploit one of the risk premia but to hedge out the other make zero excess returns.
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 The Price of Fixed Income Market Volatility by : Antonio Mele
Download or read book The Price of Fixed Income Market Volatility written by Antonio Mele and published by Springer. This book was released on 2016-01-11 with total page 259 pages. Available in PDF, EPUB and Kindle. Book excerpt: Fixed income volatility and equity volatility evolve heterogeneously over time, co-moving disproportionately during periods of global imbalances and each reacting to events of different nature. While the methodology for options-based "model-free" pricing of equity volatility has been known for some time, little is known about analogous methodologies for pricing various fixed income volatilities. This book fills this gap and provides a unified evaluation framework of fixed income volatility while dealing with disparate markets such as interest-rate swaps, government bonds, time-deposits and credit. It develops model-free, forward looking indexes of fixed-income volatility that match different quoting conventions across various markets, and uncovers subtle yet important pitfalls arising from naïve superimpositions of the standard equity volatility methodology when pricing various fixed income volatilities.
Book Synopsis How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns by : Eirini Konstantinidi
Download or read book How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns written by Eirini Konstantinidi and published by . This book was released on 2015 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explore whether the market variance risk premium (VRP) can be predicted. We measure VRP by distinguishing the investment horizon from the variance swap's maturity. We extract VRP from actual S&P 500 variance swap quotes and we test four classes of predictive models. We find that the best performing model is the one that conditions on trading activity. This relation is also economically significant. Volatility trading strategies which condition on trading activity outperform popular benchmark strategies, even once we consider transaction costs. Our finding implies that broker dealers command a greater VRP to continue holding short positions in index options in the case where trading conditions deteriorate.
Book Synopsis The Cross-Sectional Variation of Skewness Risk Premia by : Kai Wang
Download or read book The Cross-Sectional Variation of Skewness Risk Premia written by Kai Wang and published by . This book was released on 2018 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper estimates skewness risk premia on individual stocks using synthetic skew swaps and shows that there is a considerably large variation of monthly realized skewness risk premia across a representative set of portfolios which are sorted by skewness risk premium payoffs in the prior period. It then focuses on investigating the determinants of such cross-sectional variation and documents that consumption risk does not seem to be priced with respect to skewness risk premia. The market excess return and, especially, the market variance risk premium are shown to be key risk factors that drive the cross-sectional variation of skewness risk premium payoffs. The market variance risk premium factor is significantly priced with respect to skewness risk premia even if I allow for potential model misspecification. The success of the market variance risk premium factor can be potentially explained by the very different risk exposures of skewness risk premium-based portfolios to the risk proxied by the market variance risk premium. I further show that the higher the exposure of the skewness risk premium-based portfolio to such a risk, the larger skewness risk premium payoff is required in the cross section.
Book Synopsis The VIX, the Variance Premium and Stock Market Volatility by :
Download or read book The VIX, the Variance Premium and Stock Market Volatility written by and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We decompose the squared VIX index, derived from US S & P500 options prices, into the conditional variance of stock returns and the equity variance premium. We evaluate a plethora of state-of-the-art volatility forecasting models to produce an accurate measure of the conditional variance. We then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.
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
Book Synopsis Semivariance and Semiskew Risk Premiums in Currency Markets by : José Da Fonseca
Download or read book Semivariance and Semiskew Risk Premiums in Currency Markets written by José Da Fonseca and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using the model-free methodology proposed in the literature, variance and skew swaps are extracted from currency options for several foreign exchange rates. Moreover, these variables are decomposed into semivariance and semiskew swaps, which are conditional to the evolution of the foreign exchange rate, and it is shown to have higher explanatory power for currency excess return. These semivariances enable the definition of a variance-skew swap that also possesses a strong explanatory power for currency excess return. From these variables, higher moment semi-risk premiums can be computed and measure how tail risks are priced. These semivariance and semiskew swaps better explain the currency excess return than the standard or undecomposed ones. For semivariance swaps, both the up and down contracts are equally informative while for semiskew swaps only the down tail related one is. Down semivariance and semiskew swaps carry complementary information regarding the currency excess return. Trimming these variables enables us to show that extreme movements affecting the currency option market contain no information on the evolution of the currency. Lastly, forecasting tests further illustrate the importance of decomposing the variance and skew swaps into semi components as it improves significantly the results.
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 Variance Premium and Implied Volatility in a Low-liquidity Option Market by : Eduardo Astorino
Download or read book Variance Premium and Implied Volatility in a Low-liquidity Option Market written by Eduardo Astorino and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Volatility of Volatility, Expected Stock Return and Variance Risk Premium by : Ruoyang Wang
Download or read book Volatility of Volatility, Expected Stock Return and Variance Risk Premium written by Ruoyang Wang and published by . This book was released on 2015 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Theory suggests a relationship between both volatility of volatility, variance risk premium, and the equity risk premium. We empirically investigate the relationship between volatility of volatility and the equity risk premium, and the relationship between the variance risk premium and the equity risk premium. We find that volatility of volatility alone explains 5 to 10% of the total variation of equity risk premium, and together with VIX data, it explains more than 20% of the total variation of equity premium. We fail to find a significant relationship between volatility of volatility and the variance risk premium.We use six measures of volatility of volatility based on non-parametric models, a GARCH model and VVIX data.
Book Synopsis Volatility Expectations and Returns by : Lars A. Lochstoer
Download or read book Volatility Expectations and Returns written by Lars A. Lochstoer and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence that agents have slow-moving beliefs about stock market volatility that lead to initial underreaction to volatility shocks followed by delayed overreaction. These dynamics are mirrored in the VIX and variance risk premiums which reflect investor expectations about volatility and are also supported in surveys and in firm-level option prices. We embed these expectations into an asset pricing model and find that the model can account for a number of stylized facts about market returns and return volatility which are difficult to reconcile, including a weak, or even negative, risk-return tradeoff.
Book Synopsis Variance Risk Premium Demystified by : Grigory Vilkov
Download or read book Variance Risk Premium Demystified written by Grigory Vilkov and published by . This book was released on 2008 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamics and cross-sectional properties of the variance risk premia embedded in options on stocks and indices, approximated by the synthetic variance swap returns. Several important stylized facts and contributions arise. First, variance risk premia for indices are systematically larger (more negative) than for individual securities. Second, there are systematic cross-sectional differences in the price of variance in individual stocks. Linking variance swaps to firm size/book-to-market, and stock turnover characteristics, an investor gains access to several lucrative long-short strategies with Sharpe Ratios around 2.85. Third, principal component analysis reveals at most one important factor driving both stock and variance swap returns, which corresponds to the traditional market factor. For the remainder of the dynamics, the stock and its variance processes are nearly linearly independent. Fourth, we find the leverage effect through analysis of the relationship between the variance risk premium and stock to variance correlation. The systematic (market factor) part of the leverage effect provides additional evidence of the existence of one factor common to both variance swaps and stocks, but the contribution of the market risk premium to the total variance premium is very small. These findings stress the importance of using variance-based instruments in the portfolio of an investor.
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 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Credit Risk Modeling by : David Lando
Download or read book Credit Risk Modeling written by David Lando and published by Princeton University Press. This book was released on 2009-12-13 with total page 328 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit risk is today one of the most intensely studied topics in quantitative finance. This book provides an introduction and overview for readers who seek an up-to-date reference to the central problems of the field and to the tools currently used to analyze them. The book is aimed at researchers and students in finance, at quantitative analysts in banks and other financial institutions, and at regulators interested in the modeling aspects of credit risk. David Lando considers the two broad approaches to credit risk analysis: that based on classical option pricing models on the one hand, and on a direct modeling of the default probability of issuers on the other. He offers insights that can be drawn from each approach and demonstrates that the distinction between the two approaches is not at all clear-cut. The book strikes a fruitful balance between quickly presenting the basic ideas of the models and offering enough detail so readers can derive and implement the models themselves. The discussion of the models and their limitations and five technical appendixes help readers expand and generalize the models themselves or to understand existing generalizations. The book emphasizes models for pricing as well as statistical techniques for estimating their parameters. Applications include rating-based modeling, modeling of dependent defaults, swap- and corporate-yield curve dynamics, credit default swaps, and collateralized debt obligations.
Book Synopsis Volatility-of-Volatility and Tail Risk Hedging Returns by : Yang-Ho Park
Download or read book Volatility-of-Volatility and Tail Risk Hedging Returns written by Yang-Ho Park and published by . This book was released on 2015 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reports that the volatility-of-volatility implied by VIX options has predictability for tail risk hedging returns. Specifically, an increase in the volatility-of-volatility as measured by the VVIX index raises current prices of tail risk hedging options, such as S&P 500 puts and VIX calls, and lowers their subsequent returns over the next three to four weeks. The results are robust to jump risk, skewness, kurtosis, option liquidity, variance risk premium, and limit of arbitrage. The predictability can be explained by either risk premiums for a time-varying crash risk factor or uncertainty premiums for a time-varying uncertain belief in volatility.
