W. Jin, J. Livnat, and Y. Zhang, “Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?” (January 9, 2012). Journal of Accounting Research, Forthcoming.
Abstract: Recent evidence shows that option volatility skews and volatility spreads between call and put options predict equity returns. This study investigates whether such predictive ability is driven by option traders’ information advantage. We examine the predictive ability of volatility skews and volatility spreads around significant information events including earnings announcements, other firm-specific information events, and events that trigger significant … Read More »
K. Barraclough, and R. Whaley, “Early Exercise of Put Options on Stocks,” (August 17, 2011). Journal of Finance, Forthcoming.
Abstract: U.S. exchange-traded stock options are exercisable before expiration. While put options should frequently be exercised early to earn interest, they are not. In this paper, we derive an early exercise decision rule and then examine actual exercise behavior during the period January 1996 through September 2008. We find that more than 3.96 million puts that should have been exercised … Read More »
V. DeMiguel et al., “Improving Portfolio Selection Using Option-Implied Volatility and Skewness,” (June 17, 2012). Journal of Financial and Quantitative Analysis, (working series, presented by Yulia Plyakha at the OptionMetrics Research Conference 2012).
Abstract: Our objective in this paper is to examine whether one can use option-implied information to improve the selection of mean-variance portfolios with a large number of stocks, and to document which aspects of option-implied information are most useful for improving their out-of-sample performance. Portfolio performance is measured in terms of volatility, Sharpe ratio, and turnover. Our empirical evidence shows … Read More »
A. Buss and G. Vilkov, “Measuring Equity Risk with Option-Implied Correlations,” (May 31, 2012). Review of Financial Studies, Forthcoming .
Abstract: We use forward-looking information from option prices to estimate option-implied correlations and to construct an option-implied predictor of factor betas. With our implied market betas, we find a monotonically increasing risk-return relation, not detectable with standard rolling-window betas, with the slope close to the market excess return. Our implied betas confirm a risk-return relation consistent with linear factor models, … Read More »
G. Angelopoulos, D. Giamouridis, and G. Nikolakakis, “Stock Return Predictability of Cross-Market Deviations in Option Prices and Credit Default Swap Spreads,” (Athens University of Economics and Business, 24 January, 2012).
Abstract: This paper develops a framework to estimate the probability of default (PD) implied in listed stock options. The underlying option pricing model measures PD as the intensity of the jump diffusion that the underlying stock price becomes zero. We adopt a two stage calibration algorithm to obtain the precise estimator of PD. In the calibration procedure, we improve the … Read More »
G. Skiadopoulos and M. Neumann, “Predictable Dynamics in Higher Order Risk-Neutral Moments: Evidence from the S&P 500 Options.” Journal of Financial and Quantitative Analysis, Forthcoming.
Abstract: We investigate whether there are predictable patterns in the dynamics of higher order risk-neutral moments extracted from the market prices of S&P 500 index options. To this end, we conduct a horse race among alternative forecasting models within an out-of-sample context over various forecasting horizons. We consider both a statistical and an economic setting. We find that higher risk-neutral … Read More »
T. Bali and S. Murray, “Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns?” (Georgetown University, 20 April 2012).
Abstract: We investigate the pricing of risk-neutral skewness in the stock options market by creating skewness assets comprised of two option positions (one long and one short) and a position in the underlying stock. The assets are created such that exposure to changes in the price of the underlying stock (delta), and exposure to changes in implied volatility (vega) are … Read More »
A. Buss, C. Schlag, and G. Vilkov, “CAPM with Option-Implied Betas: Another Rescue Attempt,” (Working paper, Goethe University, 14 February 2012).
Abstract: We test the conditional CAPM with time-varying forward-looking betas, assuming a two-state model for the market risk premium. For market state identification we employ a recursive Markov-switching model based on a forward-looking Sentiment factor. The empirical results for our sample of S&P500 constituents for the period from 1996 to 2007 show that in ‘good’ states of the economy the … Read More »
P. Christoffersen, R. Goyenko, et. al.,”Illiquidity Premia in the Equity Options Market,” (University of Ontario, 15 March 2012).
Abstract: Illiquidity is well-known to be a significant determinant of stock and bond returns. We are the first to estimate illiquidity premia in equity option markets using effective spreads for a large cross-section of firms. The risk-adjusted return spread for illiquid over liquid options is 23 bps per day for calls. The spread for puts is somewhat lower but still … Read More »
G. Constantinides, J. Jackwerth, A. Savov, “The Puzzle of Index Option Returns,” (University of Chicago, 9 February 2012).
Abstract: We document that leverage-adjusted returns on S&P 500 index call and put portfolios are decreasing in their strike-to-price ratio over 1986-2010, contrary to the prediction of the Black-Scholes-Merton model. We test a large number of plausible unconditional factor models and find that only factors which capture jumps in the market index and market volatility and factors which capture volatility … Read More »