The Joint Cross Section of Options and Bonds PDF Download
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Author: Yoni Navon
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
This paper examines the cross section of options implied volatility and corporate bond returns. We document a strong predictive ability of corporate bond returns using changes in call and put options implied volatility. Specifically, a strategy of buying (selling) the portfolio with lowest (highest) changes in options implied volatility yields an average monthly bond return of 1.03% in excess of the risk free rate. Returns based on this strategy are statistically highly significant and economically very meaningful. The predictive ability persists up to two months. In contrast, we find no evidence that bond prices incorporate information prior to option and stock prices. Since bond investors are generally sophisticated institutional investors who process information in an efficient manner and the predictive ability of options is relatively long, we conclude that informed trading rather than superior information processing abilities is responsible for the predictive ability of options.
Author: Yoni Navon
Publisher:
ISBN:
Category :
Languages : en
Pages : 47
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Book Description
This paper examines the cross section of options implied volatility and corporate bond returns. We document a strong predictive ability of corporate bond returns using changes in call and put options implied volatility. Specifically, a strategy of buying (selling) the portfolio with lowest (highest) changes in options implied volatility yields an average monthly bond return of 1.03% in excess of the risk free rate. Returns based on this strategy are statistically highly significant and economically very meaningful. The predictive ability persists up to two months. In contrast, we find no evidence that bond prices incorporate information prior to option and stock prices. Since bond investors are generally sophisticated institutional investors who process information in an efficient manner and the predictive ability of options is relatively long, we conclude that informed trading rather than superior information processing abilities is responsible for the predictive ability of options.
Author: Byeong-Je An
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 0
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Book Description
Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decile portfolios by past call implied volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option-implied volatilities, with stocks with high past returns tending to have call and put option contracts which exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.
Author: Yonatan Navon
Publisher:
ISBN:
Category :
Languages : en
Pages : 382
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Book Description
The objective of this thesis is to examine the information content of stock options in financial markets. A key question in financial economics is how information diffuses across markets and how quickly it is reflected in security prices. This thesis aims at exploring this question by investigating the informational role that options play in financial markets. This is achieved by exploring the joint cross section of option and bond prices, the informational role of options in seasoned equity offerings (SEOs), and the information content of options trading prior to announcements of changes to the S&P 500 Index.The thesis comprises three essays, each exploring the information content of equity options trading from a different angle. The first essay examines the joint cross section of option implied volatility and corporate bond returns. Theoretical and empirical work in finance suggests that stocks and bonds of the same issuing firm should share common risk factors. Therefore, new information about a firm should affect both its stock and bond prices. However, if one market offers trading incentives over other markets, informed traders and traders with better ability to process information may choose to trade in that market over the others. As a result, markets that provide advantages to informed traders will incorporate information prior to other markets. The empirical analysis in this chapter reveals that options trading is strongly predictive of corporate bond returns. A strategy of buying (selling) the portfolio with the lowest (highest) changes in option implied volatility yields an average monthly excess bond return of 1.03%. This strategy is statistically highly significant and economically very meaningful and indicates that information is incorporated into option prices prior to bond prices. In contrast, I find no evidence that bond prices incorporate information prior to option or stock prices. Since bond investors are generally sophisticated institutional investors who process information efficiently and the predictive ability of options is persistent, I conclude that informed trading rather than superior information processing abilities is responsible for the predictive ability of options.The second essay explores the information content of option implied volatility around the announcements and issue dates of SEOs. The literature on SEOs indicates that announcements and issue dates contain important information about firms and therefore provide profitable opportunities for traders with private information. While prior research has focused on the information content of short sales around SEOs, this study focuses on the information content of options which can act as an alternative for short selling. The empirical analysis provides evidence of informed trading in the options market around SEO announcements. Around SEO issue dates, I find that higher demand for put options is significantly related to larger issue discounts which is consistent with the manipulative trading hypothesis. The results in this study indicate that regulators should consider extending the short-sale restrictions of Rule 105 to restrict trading in related securities.Finally, the third essay investigates the information content of options prior to the S&P 500 Index inclusion and exclusion announcements. These announcements are unique events since they are not announced by the firm and, as stated by S&P, they should convey no new information. In addition, the large abnormal returns observed following these announcements make them distinctive ground for testing the informational role of options. Consistent with the notion that informed traders operate in the options market, the empirical results in this essay indicate that there is a significant relationship between options trading preceding index inclusion announcements and abnormal returns following these announcements. In contrast, I find no evidence for a relationship between options trading and abnormal returns following exclusion announcements.
Author: New York Institute of Finance
Publisher: Prentice Hall
ISBN:
Category : Brokers
Languages : en
Pages : 356
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Book Description
From arbitrage to zero-coupon bonds, this all-inclusive guide explains the fundamentals of investments and their markets. Covers how broker/dealer firms function, option trading, technical and fundamental futures, exchange and over-the-counter transactions, and more.
Author: Thierry Foucault
Publisher:
ISBN:
Category : Business enterprises
Languages : en
Pages : 64
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Book Description
Author: Michael Isichenko
Publisher: John Wiley & Sons
ISBN: 1119821215
Category : Business & Economics
Languages : en
Pages : 306
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Book Description
Discover foundational and advanced techniques in quantitative equity trading from a veteran insider In Quantitative Portfolio Management: The Art and Science of Statistical Arbitrage, distinguished physicist-turned-quant Dr. Michael Isichenko delivers a systematic review of the quantitative trading of equities, or statistical arbitrage. The book teaches you how to source financial data, learn patterns of asset returns from historical data, generate and combine multiple forecasts, manage risk, build a stock portfolio optimized for risk and trading costs, and execute trades. In this important book, you’ll discover: Machine learning methods of forecasting stock returns in efficient financial markets How to combine multiple forecasts into a single model by using secondary machine learning, dimensionality reduction, and other methods Ways of avoiding the pitfalls of overfitting and the curse of dimensionality, including topics of active research such as “benign overfitting” in machine learning The theoretical and practical aspects of portfolio construction, including multi-factor risk models, multi-period trading costs, and optimal leverage Perfect for investment professionals, like quantitative traders and portfolio managers, Quantitative Portfolio Management will also earn a place in the libraries of data scientists and students in a variety of statistical and quantitative disciplines. It is an indispensable guide for anyone who hopes to improve their understanding of how to apply data science, machine learning, and optimization to the stock market.
Author: Antti Ilmanen
Publisher: John Wiley & Sons
ISBN: 1119990777
Category : Business & Economics
Languages : en
Pages : 102
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Book Description
This comprehensive reference delivers a toolkit for harvesting market rewards from a wide range of investments. Written by a world-renowned industry expert, the reference discusses how to forecast returns under different parameters. Expected returns of major asset classes, investment strategies, and the effects of underlying risk factors such as growth, inflation, liquidity, and different risk perspectives, are also explained. Judging expected returns requires balancing historical returns with both theoretical considerations and current market conditions. Expected Returns provides extensive empirical evidence, surveys of risk-based and behavioral theories, and practical insights.
Author: Alireza Javaheri
Publisher: John Wiley & Sons
ISBN: 111894397X
Category : Business & Economics
Languages : en
Pages : 325
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Book Description
A new, more accurate take on the classical approach to volatility evaluation Inside Volatility Filtering presents a new approach to volatility estimation, using financial econometrics based on a more accurate estimation of the hidden state. Based on the idea of "filtering", this book lays out a two-step framework involving a Chapman-Kolmogorov prior distribution followed by Bayesian posterior distribution to develop a robust estimation based on all available information. This new second edition includes guidance toward basing estimations on historic option prices instead of stocks, as well as Wiener Chaos Expansions and other spectral approaches. The author's statistical trading strategy has been expanded with more in-depth discussion, and the companion website offers new topical insight, additional models, and extra charts that delve into the profitability of applied model calibration. You'll find a more precise approach to the classical time series and financial econometrics evaluation, with expert advice on turning data into profit. Financial markets do not always behave according to a normal bell curve. Skewness creates uncertainty and surprises, and tarnishes trading performance, but it's not going away. This book shows traders how to work with skewness: how to predict it, estimate its impact, and determine whether the data is presenting a warning to stay away or an opportunity for profit. Base volatility estimations on more accurate data Integrate past observation with Bayesian probability Exploit posterior distribution of the hidden state for optimal estimation Boost trade profitability by utilizing "skewness" opportunities Wall Street is constantly searching for volatility assessment methods that will make their models more accurate, but precise handling of skewness is the key to true accuracy. Inside Volatility Filtering shows you a better way to approach non-normal distributions for more accurate volatility estimation.
Author: American Bar Association. House of Delegates
Publisher: American Bar Association
ISBN: 9781590318737
Category : Law
Languages : en
Pages : 216
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Book Description
The Model Rules of Professional Conduct provides an up-to-date resource for information on legal ethics. Federal, state and local courts in all jurisdictions look to the Rules for guidance in solving lawyer malpractice cases, disciplinary actions, disqualification issues, sanctions questions and much more. In this volume, black-letter Rules of Professional Conduct are followed by numbered Comments that explain each Rule's purpose and provide suggestions for its practical application. The Rules will help you identify proper conduct in a variety of given situations, review those instances where discretionary action is possible, and define the nature of the relationship between you and your clients, colleagues and the courts.
Author: John C. Cox
Publisher: Prentice Hall
ISBN:
Category : Business & Economics
Languages : en
Pages : 518
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Book Description
Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
