Download or read book Option Implied Liquidity and Stock Returns written by Minh Nguyen and published by . This book was released on 2019 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study examines a market-wide liquidity measure based on the systematic deviations from Put-Call parity in the U.S. equity option markets. We show that this implied liquidity measure provides forward-looking information about market returns and significantly explains the cross-sectional variations of stock returns. We show that investing in the stocks with the largest exposure to the innovations in the implied liquidity and shorting the stocks with the smallest generate significant returns of about 7.3 percent per annum. The explanatory power of implied liquidity for the cross-sectional variations of stock returns remain robust after controlling for various liquidity influences, the short-selling constraints and the effects of information asymmetry.
Download or read book Option Implied Equity Risk and the Cross Section of Stock Returns written by Te-Feng Chen and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Using forward-looking information in the options market, we introduce a new method for better identifying systematic market risk as a predictor for the cross-section of stock returns. Empirical results show that there is a significantly positive relation between our option-implied beta and subsequent stock returns, in which a long-short portfolio formed on the option-implied beta generates an average monthly risk-adjusted return of 0.96%. In support of its economic significance, we further find that our option-implied beta significantly predicts the future realized betas and that the associated risk premium is a strong predictor of future market returns.
Download or read book Option Implied Volatility Index and Stock Returns written by and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Implied Volatility Spreads and Future Options Returns Around Information Events and Conditions written by Chuang-Chang Chang and published by . This book was released on 2018 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Options Implied Variance and Future Stock Returns written by Hui Guo and published by . This book was released on 2014 with total page 77 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between options-implied variance and future stock returns. Consistent with Miller's (1977) divergence of opinion hypothesis, the negative relation gets stronger (1) for stocks with more stringent short-sale constraints or (2) when shorting stocks becomes more difficult. Moreover, the negative correlation of realized idiosyncratic variance or analyst forecast dispersion with future stock returns mainly reflects their close correlation with our conditional idiosyncratic variance measure.
Download or read book Using Option Implied Volatilities to Predict Absolute Stock Returns Evidence from Earnings Announcements and Annual Shareholders Meetings written by Suresh Govindaraj and published by . This book was released on 2014 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide evidence that an option implied volatility-based measure predicts future absolute excess returns of the underlying stock around earnings announcements and annual meetings of shareholders, even after controlling for the realized stock return volatility shortly before these information events, and the volatility of excess stock returns around these two events in the past. Our results imply that option traders anticipate the change in uncertainty around these two scheduled events, and also trade on the expected volatility. In addition, we show that net straddle returns (after transaction costs) around earnings announcements and annual meetings of shareholders are significantly and negatively related to the predicted volatility of returns around the events. This suggests that the writers of call and put options expect to be compensated for the predicted volatility. Overall, we find that option traders anticipate and correctly incorporate the volatility induced by the information released in quarterly earnings announcements, and annual meetings of shareholders.
Download or read book Why Do Option Prices Predict Stock Returns The Role of Price Pressure in the Stock Market written by Luis Goncalves-Pinto and published by . This book was released on 2019 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Stock and options markets can disagree about a stock's value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross- market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements due to pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.
Download or read book Trading Advantages of Structured Products and Option Implied Liquidity written by Yun Zhou and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Option Implied Volatility Skewness and Kurtosis and the Cross Section of Expected Stock Returns written by Turan G. Bali and published by . This book was released on 2019 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns are related to both the systematic and unsystematic components of volatility, only the unsystematic components of skewness and kurtosis are related to the cross section of expected stock returns after controlling for other variables known to be related to the cross section of expected stock returns or analyst forecast bias.
Download or read book Option implied Information and Predictability of Extreme Returns written by Grigory Vilkov and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index.
Download or read book Why Do Options Prices Predict Stock Returns written by Tse-Chun Lin and published by . This book was released on 2014 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use a new approach to assess the information transmission between options and stock markets. We study whether the predictive power of option-implied volatilities (IVs) on stock returns lies in analyst-related and/or earnings-related news. We find that two proxies for options trading (IV skew and IV spread) predict analyst recommendation changes, analyst forecast revisions, and earnings surprises. Next, we show that the IV skew and IV spread predict stock returns, and that the degree of predictability more than doubles around analyst-related and earnings-related events. Additionally, we find that informed traders choose to use the options market particularly because of short-sale constraints on the underlying stock. We also find that the informed options trading increases with the options market liquidity.
Download or read book Competition for Listings written by Thierry Foucault and published by . This book was released on 1999 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Asymmetric Effect of Implied Volatility on Liquidity Provision written by Daniel Cahill and published by . This book was released on 2018 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using data on a sample of NYSE stocks and their respective options contract, we examine how option-implied volatility influences liquidity provision on the equities market. Our findings suggest that in the 30-day leading up to an earnings release, implied volatility is negatively associated with liquidity provision. However, this is only observed for the bid side of the order book. Further analysis shows that the strong explanatory power of implied volatility is due to its association with future stock uncertainty.
Download or read book Information Trading Volatility and Liquidity in Option Markets written by Joseph A. Cherian and published by . This book was released on 1997 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Implied Volatility Functions written by Bernard Dumas and published by . This book was released on 1996 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Option implied Betas Moment Risk Premia and Stock Returns written by Fang Qiao and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Implied Idiosyncratic Volatility and Stock Return Predictability written by Cesario Mateus and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the role of volatility risk on stock return predictability. Using 596 stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE) for the period from January 2001 to December 2010, it examines the relation between different idiosyncratic volatility measures and expected stock returns for a period that involves both the dotcom bubble and the recent financial crisis. First it is showed that implied idiosyncratic volatility is the best stock return predictor among the different volatility measures used. Second, cross-section firm-specific characteristics are important on stock returns forecast. Third, we provide evidence that higher short selling constraints impact negatively stock returns having liquidity the opposite effect.
