P. Borochin, Y. Zhao: “What Information Does Risk Neutral Skewness Contain? Evidence From Momentum Crashes”

Stocks with high option-implied risk-neutral skewness (RNS) have positive abnormal returns driven by rebounds following poor performance. This performance reversal in past loser stocks also underlies momentum crashes. Consistent with this commonality, the RNS anomaly is strongest in periods of post-recession rebounds and high market volatility when momentum crashes occur. Furthermore, the momentum anomaly is strongest (weakest) in stocks with … Read More »


D. Muravyev, J. Pollet, N. Pearson: “Understanding Returns to Short Selling Using Option-Implied Stock Borrowing”

Measures of short sale constraints and short selling activity strongly predict stock returns. This apparently exploitable predictability is difficult to explain. We partially resolve this puzzle by using measures of the stock borrowing costs paid by short-sellers. We show in portfolio sorts that the returns to short selling, net of stock borrowing costs, are much smaller than the gross returns … Read More »


K. Hiraki, G. Skiadopoulos: “The Contribution of Frictions to Expected Returns”

In this paper, we study the contribution of frictions to expected returns (CFER). In the presence of market frictions, expected returns will be determined not only by risk factors but also by CFER. We derive an option-based formula to estimate CFER within a formal asset pricing setting. Our formula makes no assumptions on the types of frictions nor on investors’ … Read More »


P. Van Tassel: “Relative Pricing and Risk Premia in Equity Volatility Markets”

This paper provides empirical evidence that volatility markets are integrated through the time-varying term-structure of variance risk premia. These risk premia predict the returns from selling volatility for different horizons, maturities, and products including variance swaps, straddles, and VIX futures. In addition, the paper derives a closed form relationship between the prices of variance swaps and VIX futures. While tightly … Read More »


D. Toupin, M.H. Gagnon, G. Power: “Forecasting Market Index Volatility Using Ross-Recovered Distributions”

According to the Recovery Theorem (Ross, 2015), options data can reveal the market’s true, contemporaneous expectations about a specific future horizon. We implement empirically the theorem’s approach to separate implied (risk-neutral) volatility into 1) Ross-recovered true expected volatility and 2) a risk preference component, using Optionmetrics Ivy option data for the S&P500 index and four European indices (FTSE, CAC, SMI, … Read More »


P. Ares, l. Filippou, F. Zapatero – “Demand for Lotteries: the Choice Between Stocks and Options”

We show that the availability of options to retail investors displaces lottery stocks. We also find that investors are willing to pay substantial premiums only for the lottery characteristics of out-of-the-money options. Moreover, OTM options displace other types of lottery securities in the stock and option markets when available. We find evidence that uninformed traders (e.g., gamblers) may drive lottery … Read More »


A. Vasquez, X. Xiao – “Default Risk and Option Returns”

This paper studies the effects of default risk on equity option returns. We examine the cross section of delta-hedged equity option returns for Optionmetrics stock for the period January 1996 to April 2016. We find that options on stocks with high default risk  earn significantly lower returns than options on low default risk stocks. The high minus low return spreads … Read More »


C. Jones, H. Mo, T. Wang – “Does Private Information from Options Markets Forecast Aggregate Stock Returns?”

In this paper, we show that the difference between the implied volatilities of call and put options on individual equities has strong predictive power for aggregate stock market returns. This predictability is inconsistent with a rational risk premia or liquidity-based explanation. It is, however, consistent with the implied volatility spread capturing private information, based on its ability to forecast future cash flow growth and discount rate shocks.Read More »


J. Gatheral, I. Matic, Ivan, R. Radoicic, D. Stefanica – “Tighter Bounds for Implied Volatility”

We establish bounds on Black-Scholes implied volatility that improve on the uniform bounds previously derived by Tehranchi. Our upper bound is uniform, while the lower bound holds for most options likely to be encountered in practical applications. We further demonstrate the practical effectiveness of our new bounds by showing how the efficiency of the bisection algorithm is improved for a snapshot of SPX options quotes.Read More »


R.J. McGee, F. McGroarty, “The Risk Premium That Never Was: A Fair Value Explanation of the Volatility Spread”

We present a new framework to investigate the profitability of trading the volatility spread, the upward bias on implied volatility as an estimator of future realized volatility. The scheme incorporates the first four option-implied moments in a growth-optimal payoff that is statically replicated using a portfolio of options. Removing the upward bias on implied volatility worsens the likelihood score of … Read More »