Download or read book Does Skewness Matter Evidence from the Index Options Market written by Madhu Kalimipalli and published by . This book was released on 2003 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Current research on stock returns indicates that neglecting conditional skewness may bias inferences about risk. In this paper, we examine if time-varying skewness in asset returnsexplains option mispricing. We model the temporal properties of the first three moments of asset returns, and devise trading rules that use skewness forecasts to trade delta-neutralstrips, straps and straddles using at-the-money Samp;P 500 index options. We find that changes in skewness are priced in the index option markets. Our findings are robust to two conditional skewness specifications, two option-pricing models, trading costs and filters. Our results suggest that time varying skewness in the underlying asset returns could be viewed as an alternative explanation to the jump-risk argument to explain option mispricing.
Download or read book The Economic Significance of Conditional Skewness Forecasts in Option Markets written by Madhu Kalimipalli and published by . This book was released on 2007 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the link between option prices and time-varying moments of the underlying asset returns. We focus on the role of conditional skewness for option trading. We model the temporal properties of the first three moments of asset returns, and devise trading rules that use volatility and skewness forecasts to trade in delta-neutral strips, straps and straddles during the period 2000-2002, using at-the-money Samp;P 500 index options. The out-of-sample analysis indicates that trading strategies based on skewness forecasts are profitable after adjusting for delta risk at long horizons but unprofitable after allowing for trading costs. The use of a more robust skewness option pricing model and forward looking information such as option IVs, along with conditional skewness forecasts lower losses, and result in break-even trading performances after adjusting for trading costs. Our study also provides supportive evidence on the presence of market imperfections, specifically transaction costs, setting limits to arbitrage.
Download or read book Idiosyncratic Skewness Preference Or Measurement Error Evidence from the Options Market written by Kalok Chan and published by . This book was released on 2018 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: If the implied volatility is higher than the realized volatility, OTM call returns can be negative and decrease in strike prices/skewness, a return pattern also consistent with skewness preference. Empirically, we find the above return pattern is not driven by investors purchasing OTM calls, but only exists in short-term stock calls of small prices. We show large price survivorship bias elevates the call prices and causes the finding of the above return pattern. After calls whose prices are too small to quote are included, OTM call returns become positive and no longer decrease in strike skewness. Finally, we show measurement error also contributes to the finding of stock returns decreasing in ex-ante skewness computed from the options prices. Our study suggests the evidence for idiosyncratic skewness seeking from the option prices are not valid.
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%.
Download or read book Skewness Risk Premium written by Thorsten Lehnert and published by . This book was released on 2013 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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.
Download or read book Empirical Study of the Effect of Including Skewness and Kurtosis in Black Scholes Option Pricing Formula on S P CNX Nifty Index Options written by Rritu Saurabha and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The most popular model for pricing options, both in financial literature as well as in practice has been the Black-Scholes model. In spite of its wide spread use the model appears to be deficient in pricing deep in the money and deep out of the money options using statistical estimates of volatility. This limitation has been taken into account by practitioners using the concept of implied volatility. The value of implied volatility for different strike prices should theoretically be identical, but is usually seen in the market to vary. In most markets across the world it has been observed that the implied volatilities of different strike prices form a pattern of either a 'smile' or 'skew'. Theoretically, since volatility is a property of the underlying asset it should be predicted by the pricing formula to be identical for all derivatives based on that same asset. Hull [1993] and Nattenburg [1994] have attributed the volatility smile to the non normal Skewness and Kurtosis of stock returns. Many improvements to the Black-Scholes formula have been suggested in academic literature for addressing the issue of volatility smile. This paper studies the effect of using a variation of the BS model (suggested by Corrado & Sue [1996] incorporating non-normal skewness and kurtosis) to price call options on S&P CNX Nifty. The results strongly suggest that the incorporation of skewness and kurtosis into the option pricing formula yields values much closer to market prices. Based on this result and the fact that this approach does not add any further complexities to the option pricing formula, we suggest that this modified approach should be considered as a better alternative.
Download or read book Volatility Information Trading and Its Implications for Information Asymmetry Option Spreads and Implied Volatility Skew written by Wei Quan and published by . This book was released on 2013 with total page 125 pages. Available in PDF, EPUB and Kindle. Book excerpt: Information asymmetry is a critical element in today's financial markets. While asymmetric information related to directional information trading has been extensively studied in the existing literature, there is limited research and evidence on how volatility information trading impacts the options market. This dissertation studies, both theoretically and empirically, the behaviors of volatility information traders in options markets and the implications of their behaviors on information asymmetry and options pricing. I develop a model in which investors can trade multiple option contracts with varying strikes under an asymmetric framework. I show that volatility information trading is more likely to occur in Out of The Money (OTM) options if the overall presence of informed traders is low or if the relative liquidity in OTM options is better than At The Money (ATM) options. Moreover, I show that due to the variation in implicit leverage embedded in the option contracts, the OTM option contract contains a higher volatility information risk than the ATM option contract in equilibrium. In addition, I show that this volatility information risk differential plays a central role in forming the spread structure within an option series with the same underlying asset. Finally, I show that the shape of implied volatility skew (smile) is jointly determined by volatility uncertainty and heterogeneous information risk across the option contracts. I empirically examine the implications of my theory using US equity options data, including two intra-day trade and quote datasets from the Chicago Board Option Exchange (CBOE). I estimate the Volume-Synchronized Probability of Informed Trading (VPIN) variable to measure the volatility information risk in the option market. I show that OTM contracts, on average, have a higher probability of information trading than ATM contracts. I also document that volatility risk explains a considerable proportion of the spread variations in the US equity options market. Finally, I provide evidence that the difference in information asymmetry across strike prices not only helps to explain the dynamics of implied volatility skew but also has a significant impact on the degree to which a change in historical volatility affects the shape of the implied volatility skew.
Download or read book The Efficient Market Theory and Evidence written by Andrew Ang and published by Now Publishers Inc. This book was released on 2011 with total page 99 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Efficient Market Hypothesis (EMH) asserts that, at all times, the price of a security reflects all available information about its fundamental value. The implication of the EMH for investors is that, to the extent that speculative trading is costly, speculation must be a loser's game. Hence, under the EMH, a passive strategy is bound eventually to beat a strategy that uses active management, where active management is characterized as trading that seeks to exploit mispriced assets relative to a risk-adjusted benchmark. The EMH has been refined over the past several decades to reflect the realism of the marketplace, including costly information, transactions costs, financing, agency costs, and other real-world frictions. The most recent expressions of the EMH thus allow a role for arbitrageurs in the market who may profit from their comparative advantages. These advantages may include specialized knowledge, lower trading costs, low management fees or agency costs, and a financing structure that allows the arbitrageur to undertake trades with long verification periods. The actions of these arbitrageurs cause liquid securities markets to be generally fairly efficient with respect to information, despite some notable anomalies.
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:
Download or read book Are Foreign Exchange rate Distributions Skewed written by James Edward Michaels and published by . This book was released on 1995 with total page 246 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Acta Physica Polonica written by and published by . This book was released on 2006 with total page 796 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Skew Pattern of Implied Volatility in the DAX Index Options Market written by Silvia Muzzioli and published by . This book was released on 2009 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Trading Volatility written by Colin Bennett and published by . This book was released on 2014-08-17 with total page 316 pages. Available in PDF, EPUB and Kindle. Book excerpt: This publication aims to fill the void between books providing an introduction to derivatives, and advanced books whose target audience are members of quantitative modelling community. In order to appeal to the widest audience, this publication tries to assume the least amount of prior knowledge. The content quickly moves onto more advanced subjects in order to concentrate on more practical and advanced topics. "A master piece to learn in a nutshell all the essentials about volatility with a practical and lively approach. A must read!" Carole Bernard, Equity Derivatives Specialist at Bloomberg "This book could be seen as the 'volatility bible'!" Markus-Alexander Flesch, Head of Sales & Marketing at Eurex "I highly recommend this book both for those new to the equity derivatives business, and for more advanced readers. The balance between theory and practice is struck At-The-Money" Paul Stephens, Head of Institutional Marketing at CBOE "One of the best resources out there for the volatility community" Paul Britton, CEO and Founder of Capstone Investment Advisors "Colin has managed to convey often complex derivative and volatility concepts with an admirable simplicity, a welcome change from the all-too-dense tomes one usually finds on the subject" Edmund Shing PhD, former Proprietary Trader at BNP Paribas "In a crowded space, Colin has supplied a useful and concise guide" Gary Delany, Director Europe at the Options Industry Council
Download or read book Caught Up in the Higher Moments written by Ronald Jared DeLisle and published by . This book was released on 2010 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt: ABSTRACT: This dissertation examines if information extracted from the options markets is priced in the cross-section of equity returns and whether or not this information is a systematic risk factor. Several versions of the Intertemporal Capital Asset Pricing Model predict that changes in aggregate volatility are priced into the cross-section of stock returns. Literature confirms that changes in expected future market volatility are priced into the cross-section of stock returns. Several of these studies use the VIX Index as proxy for future market volatility, and suggest that it is a risk factor. However, prior studies do not test whether asymmetric volatility affects if firm sensitivity to changes in VIX is related to risk, or is just a characteristic uniformly affecting all firms. The first chapter of my dissertation examines the asymmetric relation of stock returns and changes in VIX. The study finds that sensitivity to VIX innovations affects returns when volatility is rising, but not when it is falling. When VIX rises this sensitivity is a priced risk factor, but when it falls there is a positive impact on all stocks irrespective of VIX loadings. The second essay of my dissertation uses the second, third, and fourth moments of the risk-neutral density extracted from options on the S & P 500 as the proxy for changes in the expected future market return distribution rather than just the VIX index. The VIX index, while easily obtained, contains limited information due to its construction. The risk-neutral moments map one-to-one to the real-world volatility smile from market options, and contain all the information in the cross-section of market option moneyness and provide a richer proxy for changes in expected future market return distribution. The analyses find that positive change in risk-neutral skewness is a risk-factor and that change in risk-neutral kurtosis is not. The evidence for change in risk-neutral volatility being a risk factor, however, is ambiguous.
Download or read book Where is My School Band 03 Yellow Collins Big Cat written by Alison Sage and published by HarperCollins UK. This book was released on 2017-11-15 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is a non-fiction information book about Kim, who tells us about the location of her school. The book shows the exact whereabouts of Kim's classroom within her school, and then expands to locate her school in her city, country and the world. Illustrations include labelled photographs, simple maps, aerial maps and an image of the Earth.
Download or read book The Skew Risk Premium in the Equity Index Market written by Roman Kozhan and published by . This book was released on 2019 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between the skew in implied volatility and realized skew. Like the variance swap, the skew swap corresponds to a trading strategy, necessary to assess risk premia in a model-free way. We find that almost half of the implied volatility skew can be explained by the skew risk premium. We provide evidence that skew and variance premia are manifestations of the same underlying risk factor in the sense that strategies designed to exploit one of the risk premia but to hedge out the other make zero excess returns.
