scholarly journals PREDICTABILITY AND PREDICTORS OF VOLATILITY SMIRK: A STUDY ON INDEX OPTIONS

2017 ◽  
Vol 18 (0) ◽  
pp. 64-70
Author(s):  
Rajesh Pathak ◽  
Amarnath Mitra
Keyword(s):  
Risk Premium ◽  
Least Square ◽  
Index Options ◽  
Volatility Risk ◽  
Market Risk Premium ◽  
Temporal Properties ◽  
Auto Regressive ◽  
Gls Estimation ◽  
Marginal Returns ◽  
Returns On Investment

The purpose of this study is to examine the presence of volatility smirk anomaly in index options and its predictability for future returns. The study tests the temporal properties of volatility smirk and further explores the factors determining the anomaly. The daily volatility smirk is computedfor the period 2004–2014 and the first lag of smirk is used in generalized least square (GLS) estimation framework, with set of control variables in two different specifications, to test the predictability as well as the determinants of volatility smirk. The study reports significant presence of volatility smirk in index options with an auto–regressive structure. Smirk predicts marginal returns and the predictability is robust to the control of major risk factors. It is also found that open interest of calls and puts, along with market risk premium and momentum premium, act as significant predictor of volatility smirk. The results are helpful in enhancing returns on investment in Index based funds and designing options strategies from the perspective of volatility risk. The study is first of its kind in the Indian market examining the reasons and consequences of existence of volatility smirk in index options.

Determinants of the Index Straddle Returns

2013 ◽  
Vol 21 (4) ◽  
pp. 411-434
Author(s):  
Byung Jin Kang
Keyword(s):  
Risk Premium ◽  
Trading Strategies ◽  
Excess Returns ◽  
Index Options ◽  
Volatility Risk ◽  
Volatility Risk Premium ◽  
Theoretical View

This paper investigates ATM zero-beta straddle (i.e., ZBS) returns, one of the most widely used volatility trading strategies, and then examines the determinants of them. First, from a point of theoretical view, we find that the determinants of the ZBS returns without rebalancing are different from those with rebalancing. This means that most previous studies overlooking the return characteristics by difference of rebalancing frequency could result in misleading implications. Next, from a point of empirical view, we find that the negative excess returns are also obtained by taking a long position in ZBS on the KOSPI 200 index options, as in most other markets. Even though these negative excess returns are not strongly significant, but they are found to be closely related to the volatility risk premium.

scholarly journals Asymmetric Volatility Risk: Evidence from Option Markets*

2018 ◽  
Vol 23 (4) ◽  
pp. 777-799 ◽  
Author(s):  
Jens Jackwerth ◽  
Grigory Vilkov
Keyword(s):  
Risk Premium ◽  
Option Prices ◽  
Index Options ◽  
Option Markets ◽  
Volatility Risk ◽  
Asymmetric Volatility ◽  
Risk Neutral ◽  
Correlation Risk ◽  
Marginal Risk ◽  
Implied Correlation

Abstract Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions (RNDs) of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate RND cannot be inferred from the marginals, we propose a novel identification based on long-dated index options. We estimate the risk-neutral asymmetric volatility implied correlation (AVIC) and find it to be significantly lower than its realized counterpart. We interpret the economics of the asymmetric volatility correlation risk premium and use AVIC to predict returns, volatility, and risk-neutral quantities.

The Volatility Risk Premium in the KOSPI200 Index Options

2009 ◽  
Vol 17 (2) ◽  
pp. 67-86
Author(s):  
Hyoung-Jin Park
Keyword(s):  
Risk Premium ◽  
Empirical Method ◽  
Option Prices ◽  
Options Market ◽  
Index Options ◽  
Volatility Risk ◽  
Put Options ◽  
Volatility Risk Premium ◽  
Bid Ask Spread ◽  
Delta Hedging

This study examines whether the volatility risk premium is reflected on the prices of the KOSPI200 index options. By applying the empirical method of Bakshi and Kapadia (2003), we analyze the performance of delta-hedging strategy in the KOSPI200 index market. They showed the existence of the negative volatility risk premium in the S&P 500 index options as well as derived theoretical positive relationship between the volatility risk premium and delta-hedging gains. However, in the results of this study, contrary to those in the S&P 500 index options market, we do not observe the volatility risk premium. Delta-hedged gains of ATM options are not significantly negative. Delta-hedged gains are not more negative as historical volatility increases and as options' vega and remaining maturity increase. However, the notable finding of this study is that delta-hedged gains of OTM options and put options are negative and signigicant. This results can be caused by the phenomenon of overpriced puts or by market microstructure factors, such as relatively wide bid-ask spread and high tick size. In a simple examination of comparison between changes in traded option prices and changes in the Black-Scholes option prices during delta-hedging period, negative delta-hedged gains seem to be attributed to too small changes in call option prices and too large changes in put option prices. In conclusion, by analyzing the delta-hedged gains, the volatility risk risk premium seems not be observed in the KOSPI200 index options market.

A Study on the Return Dynamics using the Implied Information

2007 ◽  
Vol 15 (2) ◽  
pp. 55-83
Author(s):  
Moo Sung Kim ◽  
Tae Hun Kang
Keyword(s):  
Risk Premium ◽  
Asset Price ◽  
Stock Index ◽  
Index Options ◽  
Volatility Risk ◽  
Underlying Asset ◽  
One Dimensional ◽  
Dimensional Diffusion ◽  
Option Model ◽  
Return Dynamics

This article empirically analyzes some properties by all one-dimensional diffusion option models by using the martingale restriction test and examines the systematic risk factors Implied In return dynamics of KOSPI 200 index options. We find that the martingale restriction under one-dimensional diffusion option model is strongly rejected by the data because of the negative volatility risk premium. Therefore options are not redundant securities, nor monotonically increasing (decreasing) in the underlying asset price and also option prices are not perfectly correlated with each other and with the underlying asset. And under the non-complete of the market. the informational led-lag relationship between the stock indices and the stock index options exist.

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