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Stochastic Skewness And Index Option Returns
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Book Synopsis Stochastic Skewness and Index Option Returns by : Cai Zhu
Download or read book Stochastic Skewness and Index Option Returns written by Cai Zhu and published by . This book was released on 2015 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: In literature, many researchers focus on information contained in stochastic volatility dynamics, such as CBOE VIX index and its risk premium. However, there are relatively fewer studies on stochastic skewness dynamics. Simple linear regression indicates that stochastic volatility and stochastic skewness have different information about economic fundamentals: regressing CBOE VIX index on CBOE Skewness index, ranging from 1990 to 2013, yields R2 only 2%. Motivated by such striking yet simple empirical result and advances in reduced-form option pricing literature, we build one discrete-time equilibrium option pricing model with non-normal innovation. In our framework, market return skewness is driven by a stochastic process independent of volatility. Thus volatility and skewness dynamics possess different information about stochastic investment opportunity. Specifically, we use Variance Gamma distribution to generate economic growth shocks. Variance gamma innovation is able to be decomposed into two shocks, one of them is strictly positive, and the other is strictly negative. Our skewness risk factor controls the frequency and magnitude of these two shocks, therefore, controls the switching behavior of economic condition, e.g. from good to bad state. We show in our model that stochastic skewness risk should be priced, provided that investors have recursive utility function. Empirically, using Fama-Macbeth two pass regression and a panel of S&P 500 index option returns, we find that stochastic skewness has positive, statistically significant risk premium, and its sign does not change across our sample period. Moreover, our results show that skewness risk has superior explanation power for index option returns, compared with performance of volatility risk and Merton-type of jump risk. The shock of skewness risk premium is able to predict short-term market excess returns, the R2 is as high as 7%.
Book Synopsis Stochastic Skewness and Index Put Option Returns by : Cai Zhu
Download or read book Stochastic Skewness and Index Put Option Returns written by Cai Zhu and published by . This book was released on 2016 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 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 Analogy Making and the Puzzles of Index Option Returns and Implied Volatility Skew by : Hammad Siddiqi
Download or read book Analogy Making and the Puzzles of Index Option Returns and Implied Volatility Skew written by Hammad Siddiqi and published by . This book was released on 2015 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: An anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse expected utility maximization when there are proportional transaction costs. The anchoring model provides a unified explanation for key option pricing puzzles. Two predictions of the anchoring model are empirically tested and found to be strongly supported with nearly 26 years of options data.
Book Synopsis Pricing Volatility Options Under Stochastic Skew with Application to the VIX Index by : Jacinto Marabel Romo
Download or read book Pricing Volatility Options Under Stochastic Skew with Application to the VIX Index written by Jacinto Marabel Romo and published by . This book was released on 2015 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: In recent years there has been a remarkable growth of volatility options. In particular, VIX options are among the most actively trading contracts at CBOE. These options exhibit upward sloping volatility skew and the shape of the skew is largely independent of the volatility level. To take into account these stylized facts, this article introduces a novel two-factor stochastic volatility model with mean reversion that accounts for stochastic skew consistent with empirical evidence. Importantly, the model is analytically tractable. In this sense, I solve the pricing problem corresponding to standard-start, as well as to forward-start European options through the Fast Fourier Transform.To illustrate the practical performance of the model, I calibrate the model parameters to the quoted prices of European options on the VIX index. The calibration results are fairly good indicating the ability of the model to capture the shape of the implied volatility skew associated with VIX options.
Book Synopsis A Stochastic Volatility Model with Conditional Skewness by : Bruno Feunou
Download or read book A Stochastic Volatility Model with Conditional Skewness written by Bruno Feunou and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Pricing Efficiency in the Long-term Index Options Market by : Anuradha Kandikuppa
Download or read book Pricing Efficiency in the Long-term Index Options Market written by Anuradha Kandikuppa and published by . This book was released on 1999 with total page 250 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies by : Peter Carr
Download or read book Stochastic Risk Premiums, Stochastic Skewness in Currency Options, and Stochastic Discount Factors in International Economies written by Peter Carr and published by . This book was released on 2011 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop models of stochastic discount factors in international economies that produce stochastic risk premiums and stochastic skewness in currency options. We estimate the models using time-series returns and option prices on three currency pairs that form a triangular relation. Estimation shows that the average risk premium in Japan is larger than that in the US or the UK, the global risk premium is more persistent and volatile than the country-specific risk premiums, and investors respond differently to different shocks. We also identify high-frequency jumps in each economy, but find that only downside jumps are priced. Finally, our analysis shows that the risk premiums are economically compatible with movements in stock and bond market fundamentals.
Book Synopsis Handbooks in Operations Research and Management Science: Financial Engineering by : John R. Birge
Download or read book Handbooks in Operations Research and Management Science: Financial Engineering written by John R. Birge and published by Elsevier. This book was released on 2007-11-16 with total page 1026 pages. Available in PDF, EPUB and Kindle. Book excerpt: The remarkable growth of financial markets over the past decades has been accompanied by an equally remarkable explosion in financial engineering, the interdisciplinary field focusing on applications of mathematical and statistical modeling and computational technology to problems in the financial services industry. The goals of financial engineering research are to develop empirically realistic stochastic models describing dynamics of financial risk variables, such as asset prices, foreign exchange rates, and interest rates, and to develop analytical, computational and statistical methods and tools to implement the models and employ them to design and evaluate financial products and processes to manage risk and to meet financial goals. This handbook describes the latest developments in this rapidly evolving field in the areas of modeling and pricing financial derivatives, building models of interest rates and credit risk, pricing and hedging in incomplete markets, risk management, and portfolio optimization. Leading researchers in each of these areas provide their perspective on the state of the art in terms of analysis, computation, and practical relevance. The authors describe essential results to date, fundamental methods and tools, as well as new views of the existing literature, opportunities, and challenges for future research.
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 Pricing and Hedging Index Options Under Stochastic Volatility by : Saikat Nandi
Download or read book Pricing and Hedging Index Options Under Stochastic Volatility written by Saikat Nandi and published by . This book was released on 1996 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 Beyond Stochastic Volatility and Jumps in Returns and Volatility by : Garland Durham
Download or read book Beyond Stochastic Volatility and Jumps in Returns and Volatility written by Garland Durham and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: While a great deal of attention has been focused on stochastic volatility in stock returns, there is strong evidence suggesting that return distributions have time-varying skewness and kurtosis as well. Under the risk-neutral measure, for example, this can be seen from variation across time in the shape of Black-Scholes implied volatility smiles. This paper investigates model characteristics that are consistent with variation in the shape of return distributions using a stochastic volatility model with a regime-switching feature to allow for random changes in the parameters governing volatility of volatility, leverage effect and jump intensity. The analysis consists of two steps. First, the models are estimated using only information from observed returns and option-implied volatility. Standard model assessment tools indicate a strong preference in favor of the proposed models. Since the information from option-implied skewness and kurtosis is not used in fitting the models, it is available for diagnostic purposes. In the second step of the analysis, regressions of option-implied skewness and kurtosis on the filtered state variables (and some controls) suggest that the models have strong explanatory power for these characteristics.
Book Synopsis Stochastic Skew in Currency Options by : Peter Carr
Download or read book Stochastic Skew in Currency Options written by Peter Carr and published by . This book was released on 2008 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that the risk-neutral distribution of currency returns is relatively symmetric on average. However, on any given date, the conditional currency return distribution can show strong asymmetry. This asymmetry varies greatly over time and often switch directions. We design and estimate a class of models that capture these unique features of the currency options prices and perform much better than traditional jump-diffusion stochastic volatility models.
Book Synopsis Information Uncertainty, Volatility Term Structure and Index Option Returns by : Cai Zhu
Download or read book Information Uncertainty, Volatility Term Structure and Index Option Returns written by Cai Zhu and published by . This book was released on 2015 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we explore the relation between information uncertainty and S&P 500 index option returns. Since underlying state variable affecting economy is unobservable, investors have to obtain their own estimations based on available information. During such procedure, it is inevitable that their results are contaminated by various kinds of noise signals. Therefore, investors cannot be 100% confident about the their estimations. We model such phenomena through incorporating investors' learning behavior into an equilibrium stochastic volatility model. In the model, we introduce noise signals as a stochastic process independent with economic fundamentals. Such information uncertainty is able to generate time-varying volatility for stock returns, even when volatility of economic fundamental is constant. As a source of risk, for investors with recursive preference, it is priced and is able to explain variance premium and cross-section index option returns. In order to test the model implication, empirically, we construct several proxies for information uncertainty. Consistent with model intuition, we show that information uncertainty as a systematic risk factor is able to explain variance premium term structure and has better performance to explain cross-section index option returns than traditional symmetric risk factors such as volatility and jump.
