Implied Volatility Spreads and Expected Market Returns PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download Implied Volatility Spreads and Expected Market Returns PDF full book. Access full book title Implied Volatility Spreads and Expected Market Returns by Yigit Atilgan. Download full books in PDF and EPUB format.
Author: Yigit Atilgan
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
Get Book Here
Book Description
This paper investigates the intertemporal relation between volatility spreads and expected returns on the aggregate stock market. We provide evidence for a significantly negative link between volatility spreads and expected returns at the daily and weekly frequencies. We argue that this link is driven by the information flow from option markets to stock markets. The documented relation is significantly stronger for the periods during which (i) S&P 500 constituent firms announce their earnings; (ii) cash flow and discount rate news are large in magnitude; and (iii) consumer sentiment index takes extreme values. The intertemporal relation remains strongly negative after controlling for conditional volatility, variance risk premium and macroeconomic variables. Moreover, a trading strategy based on the intertemporal relation with volatility spreads has higher portfolio returns compared to a passive strategy of investing in the S&P 500 index, after transaction costs are taken into account.
Author: Yigit Atilgan
Publisher:
ISBN:
Category :
Languages : en
Pages : 57
Get Book Here
Book Description
This paper investigates the intertemporal relation between volatility spreads and expected returns on the aggregate stock market. We provide evidence for a significantly negative link between volatility spreads and expected returns at the daily and weekly frequencies. We argue that this link is driven by the information flow from option markets to stock markets. The documented relation is significantly stronger for the periods during which (i) S&P 500 constituent firms announce their earnings; (ii) cash flow and discount rate news are large in magnitude; and (iii) consumer sentiment index takes extreme values. The intertemporal relation remains strongly negative after controlling for conditional volatility, variance risk premium and macroeconomic variables. Moreover, a trading strategy based on the intertemporal relation with volatility spreads has higher portfolio returns compared to a passive strategy of investing in the S&P 500 index, after transaction costs are taken into account.
Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
Get Book Here
Book Description
We examine the relation between expected future volatility (options' implied volatility) and the cross-section of expected returns. A trading strategy buying stocks in the highest implied volatility quintile and shorting stocks in the lowest implied volatility quintile generates insignificant returns. A similar strategy using one-month lagged realized volatility generates significantly negative returns. To investigate the differences and interactions between alternative measures of total risk, we estimate three principal components based on realized volatility, call implied and put implied volatility. Long-short trading strategies generate significant returns only for the second and the third principal components. We find that the second principal component is related to the realized-implied volatility spread which can be viewed as a proxy for volatility risk. We find that the third principal component is related to the call-put implied volatility spread that reflects future price increase of the underlying stock.
Author: Chuang-Chang Chang
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
Get Book Here
Book Description
While numerous prior studies report that call-put implied volatility spreads positively predict future stock returns, recent literature shows that the predictive relation is negative for future call option returns. We investigate whether and, if so, how the predictive relation for options returns is influenced by various information events and conditions. In addition to confirming an opposite predictive relation for both call and put returns, we show that the predictive relation is stronger during periods of earnings announcement and/or high sentiment. In addition, we find that investors learn from informed trading and revise their predictability bias by examining the impacts of information asymmetry, stock liquidity, and options liquidity on the predictive relationships.
Author: 姜奕帆
Publisher:
ISBN:
Category :
Languages : en
Pages :
Get Book Here
Book Description
Author: Maxim Sokolov
Publisher:
ISBN:
Category : Options (Finance)
Languages : en
Pages : 99
Get Book Here
Book Description
"I develop a new explanation of the implied volatility spread anomaly of Bali and Hovakimian (2009) and Cremers and Weinbaum (2010). The stock price observed in the stock market and the option implied stock price inferred from the option market are two noisy sources of information about the stock value. If these sources contain enough nonredundant information, the estimate of the stock value is between these prices, and the prices are expected to revert toward this estimate. This simple model is able to explain the reversals of the option implied prices toward the stock prices. Overall, the model of noisy prices is better aligned with the empirical patterns associated with the implied volatility spread phenomenon than other existing explanations of the phenomenon. I also document that if we invest in the implied volatility spread strategy at the end of each month, the next day excess return is 71 bps, which is almost twice as high as the average daily excess return of the implied volatility spread strategy. I show that this abnormal return from the end-of-month signal does not seem to be driven by seasonal trading patterns of institutional investors. If we take into account transaction costs, active trading on the implied volatility spread is too costly even for the marginal investor. This result is consistent with the model of noisy prices. However, the implied volatility spread can be used as a signal for the optimization of other trading strategies. If the implied volatility spread is used as a screening signal for a small stocks strategy, it modestly improves the performance of the baseline strategy"--Page vii.
Author: Yigit Atilgan
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
Get Book Here
Book Description
Prior research documents that volatility spreads predict stock returns. If the trading activity of informed investors is an important driver of volatility spreads, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by volatility spreads is stronger during earnings announcements. Volatility spreads are measured by the implied volatility differences between pairs of strike price and expiration date matched put and call options and capture price pressures in the option market. During a two-day earnings announcement window, the abnormal returns to the quintile that includes stocks with relatively expensive call options is more than 1.5 percent greater than the abnormal returns to the quintile that includes stocks with relatively expensive put options. This result is robust after measuring volatility spreads in alternative ways and controlling for ጿirm characteristics and lagged equity returns. The degree of announcement return predictability is stronger when volatility spreads are measured using more liquid options, the information environment is more asymmetric, and stock liquidity is low.
Author: Charles Conrick, IV
Publisher: John Wiley & Sons
ISBN: 1118537009
Category : Business & Economics
Languages : en
Pages : 256
Get Book Here
Book Description
Make trades on vertical options spreads with the precision of a laser beam Vertical Options Spreads is a combination of a bona-fide academic research-based study and a complete method to trade credit and debit spreads, along with other complex option combination trades such as iron condors and butterflies. Here, the author has accumulated five years of daily data on the ETF, SPY and provided historical evidence of actual win rates at specific multiples of entry points, both in time and price level. For example, traders will be able to use the weekly options, pick a level of risk and return desired, learn how to place the trade, and then discover the actual percent return that the trade would have yielded. This must-have resource includes the basics of option trading and contains references to many excellent works by other authors that explore more about the intricacies of option mechanics and trading. It is far more than an analysis of one specific asset, SPY, featuring a study of probability theory and how it has applied to trading over the past five years, including the highly volatile 2007 to 2009 time frame and the more "normal" 2010 to 2012 time period. The book offer a thorough understanding of how price movement, actual volatility, and implied volatility all provide a complex but workable web in which the informed trader can generate excellent returns. However, the trader must have the discipline to act within the confines of probability and the "law" of large numbers refusing to place trades based on gut feelings or hunches. Offers high-probability based trading that uses the new weekly options Contains handy interactive worksheets that allow traders to select their own risk/return with precision Includes a website with daily and weekly information on the estimate of the actual standard deviation points on the price spectrum Vertical Options Spreads offers traders a research-based guide for trading Standard & Poors 500 ETF, SPY using historic and estimated probabilities and returns that will give them an edge in the marketplace.
Author: 李原豪
Publisher:
ISBN:
Category :
Languages : en
Pages : 76
Get Book Here
Book Description
Author: Peter F. Pope
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
Get Book Here
Book Description
If returns on two assets share common volatility components, the prices of options on the assets should be interdependent and the implied volatility spread should mean revert. We, first demonstrate, using the canonical correlation method, that there is a common component among the volatilities of the returns on Samp;P 100 and Samp;P 500 indexes. We then exploit this commonality by trading on the volatility spread between tick-by-tick OEX and SPX call options listed on the CBOE. Our vega-delta-neutral strategies generated significant profits, even after transaction costs are taken into account. The results suggest that the two options markets are not jointly efficient.
Author: Bernard Dumas
Publisher:
ISBN:
Category : Options (Finance)
Languages : en
Pages : 34
Get Book Here
Book Description
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.
