A Smiling Bear in the Equity Options Market and the Cross-Section of Stock Returns
Author | : Hye-hyun Park |
Publisher | : |
Total Pages | : 46 |
Release | : 2018 |
ISBN-10 | : OCLC:1304490402 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book A Smiling Bear in the Equity Options Market and the Cross-Section of Stock Returns written by Hye-hyun Park and published by . This book was released on 2018 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of excess tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual U.S.-listed stocks during 2000-2013, we find that the average return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate the contribution of informed options trading to price discovery in terms of the realization of tail-risk aversion in the stock market.