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Option Implied Downside Risk Premiums
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Book Synopsis Option-Implied Downside Risk Premiums by : Yao Li
Download or read book Option-Implied Downside Risk Premiums written by Yao Li and published by . This book was released on 2015 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the index options to replicate the downside risk factors and their average excess returns provide estimates of downside risk premiums. We show that all the market risk premium comes from the downside. The mimicking portfolio returns also show that most of the downside risk premium is associated with large market-level losses that are rarely observed. In contrast, investors seem to require little excess return for bearing moderate market-level losses. Therefore, the downside risk premium is largely a tail risk premium. We compare the downside risk premiums measured from stocks and the options to examine whether the risk is priced consistently across the two markets. Our evidence raises several concerns about the downside risk premium measures from the stock market. Overall, we find no robust evidence that downside risks are priced in the stock market in the same way as in the options market.
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 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 Options for Volatile Markets by : Richard Lehman
Download or read book Options for Volatile Markets written by Richard Lehman and published by John Wiley & Sons. This book was released on 2011-08-09 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt: Practical option strategies for the new post-crisis financial market Traditional buy-and-hold investing has been seriously challenged in the wake of the recent financial crisis. With economic and market uncertainty at a very high level, options are still the most effective tool available for managing volatility and downside risk, yet they remain widely underutilized by individuals and investment managers. In Options for Volatile Markets, Richard Lehman and Lawrence McMillan provide you with specific strategies to lower portfolio volatility, bulletproof your portfolio against any catastrophe, and tailor your investments to the precise level of risk you are comfortable with. While the core strategy of this new edition remains covered call writing, the authors expand into more comprehensive option strategies that offer deeper downside protection or even allow investors to capitalize on market or individual stock volatility. In addition, they discuss new offerings like weekly expirations and options on ETFs. For investors who are looking to capitalize on global investment opportunities but are fearful of lurking "black swans", this book shows how ETFs and options can be utilized to construct portfolios that are continuously protected against unforeseen calamities. A complete guide to the increased control and lowered risk covered call writing offers active investors and traders Addresses the changing investment environment and how to use options to succeed within it Explains how to use options with exchange-traded funds Understanding options is now more important than ever, and with Options for Volatile Markets as your guide, you'll quickly learn how to use them to protect your portfolio as well as improve its overall performance.
Book Synopsis Options for Risk-Free Portfolios by : M. Thomsett
Download or read book Options for Risk-Free Portfolios written by M. Thomsett and published by Springer. This book was released on 2015-12-11 with total page 411 pages. Available in PDF, EPUB and Kindle. Book excerpt: An advanced strategic approach using options to reduce market risks while augmenting dividend income, this title moves beyond the basics of stocks and options. It shows how the three major segments (stocks, dividends, and options) are drawn together into a single and effective strategy to maximize income while eliminating market risk.
Book Synopsis Preparing for the Worst by : Hrishikesh (Rick) D. Vinod
Download or read book Preparing for the Worst written by Hrishikesh (Rick) D. Vinod and published by John Wiley & Sons. This book was released on 2004-11-11 with total page 316 pages. Available in PDF, EPUB and Kindle. Book excerpt: A timely approach to downside risk and its role in stock market investments When dealing with the topic of risk analysis, most books on investments treat downside and upside risk equally. Preparing for the Worst takes an entirely novel approach by focusing on downside risk and explaining how to incorporate it into investment decisions. Highlighting this asymmetry of the stock market, the authors describe how existing theories miss the downside and follow with explanations of how it can be included. Various techniques for calculating downside risk are demonstrated. This book presents the latest ideas in the field from the ground up, making the discussion accessible to mathematicians and statisticians interested in applications in finance, as well as to finance professionals who may not have a mathematical background. An invaluable resource for anyone wishing to explore the critical issues of finance, portfolio management, and securities pricing, this book: Incorporates Value at Risk into the theoretical discussion Uses many examples to illustrate downside risk in U.S., international, and emerging market investments Addresses downside risk arising from fraud and corruption Includes step-by-step instructions on how to implement the methods introduced in this book Offers advice on how to avoid pitfalls in calculations and computer programming Provides software use information and tips
Book Synopsis Explaining Downside Risk Premia in Equity Markets by : Alexander Feser
Download or read book Explaining Downside Risk Premia in Equity Markets written by Alexander Feser and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The downside risk premium of a stock is caused by the shape of the risk-neutral distribution and the Downside Risk Capital Asset Pricing Model (DR-CAPM) is accurately explained by the risk-neutral moments of stocks. Using a set of 179 million equity options, this thesis demonstrates that the risk-neutral variance, risk-neutral skewness and risk-neutral kurtosis determine stocks ex-ante exposure to downside risk and ex-ante returns. A risk-neutral representation of beta and downside beta is derived and it implies that the downside risk premium is a compensation for the non-normality of the underlying return distribution.
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 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 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.
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 Option-Implied Spreads and Option Risk Premia by : Christopher L. Culp
Download or read book Option-Implied Spreads and Option Risk Premia written by Christopher L. Culp and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option's implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.
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.
Book Synopsis Option Implied Dividends and the Market Risk Premium by : Hamish Malloch
Download or read book Option Implied Dividends and the Market Risk Premium written by Hamish Malloch and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new method for computing a lower bound to the expected future dividend component of the market risk premium from observed option prices. We find that our estimate of future dividend yields has similar characteristics to future realized dividend yields, exhibits significant volatility, is a strong predictor of the realized dividend yield and constitutes at least 27% of the total market risk premium in the US.
Book Synopsis Risk Premia Implied by Option Returns by : Reto Andreas Bachmann
Download or read book Risk Premia Implied by Option Returns written by Reto Andreas Bachmann and published by . This book was released on 2000 with total page 366 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis On the Negative Market Volatility Risk-Premium by : Alfredo Ibañez
Download or read book On the Negative Market Volatility Risk-Premium written by Alfredo Ibañez and published by . This book was released on 2007 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Existing evidence indicates that (i) average returns of purchased delta-hedged options are negative, implying options are expensive, and (ii) volatility is the most important extra risk that is factored into option prices. Therefore, a natural extension is to explain the cross-section of average delta-hedged option returns in a stochastic volatility model. This paper solves this problem by introducing a measure of option overprice, which quantifies the impact on option prices of the volatility risk premium. It is an application of option-pricing in incomplete markets under stochastic volatility. An extensive numerical exercise shows the option overprice is consistent with the cross-section of average delta-hedged returns of calls, puts, and straddles reported by the literature for the Samp;P 500 index, except for expensive short-term out-of-the-money puts. In a stochastic volatility model, the volatility risk of at- and, especially, out-of-the-money calls and puts is several times larger than market volatility, which explains large negative volatility risk premiums if volatility risk is negative priced.
Book Synopsis The Information Content of Option-Implied Volatility for Credit Default Swap Valuation by : Charles Cao
Download or read book The Information Content of Option-Implied Volatility for Credit Default Swap Valuation written by Charles Cao and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit default swaps (CDS) are similar to out-of-the-money put options in that both offer a low cost and effective protection against downside risk. This study investigates whether put option-implied volatility is an important determinant of CDS pricing. Using a large sample of firms with both CDS and options data, we find that individual firms' put option-implied volatility dominates historical volatility in explaining the time-series variation in CDS spreads. To understand this result, we show that implied volatility is a more efficient forecast for future realized volatility than historical volatility. More importantly, the volatility risk premium embedded in option prices covaries with the CDS spread. These findings complement existing empirical evidence based on market-level data.
