J. Cao and B. Han, “Option Returns and Individual Stock Volatility,” (University of Hong Kong and University of Texas, November 2009).

Abstract: This paper studies the cross-sectional determinants of delta-hedged stock option returns with an emphasis on the pricing of volatility risk. We find that the average delta-hedged option returns are significantly negative for most stocks, and their magnitudes increase monotonically with the volatility of the underlying stock.Writing covered calls on high volatility stocks on average earns about 2% more per … Read More »

P. Christoffersen, K. Jacobs, C. Ornthanalai, “Exploring Time-Varying Jump Intensities: Evidence from S&P500 Returns and Options,” (McGill University, 19 November 2009).

Abstract: Existing empirical investigations of jump dynamics in returns and volatility are fairly complicated due to the presence of latent factors. We present a new discrete-time frame-work that combines heteroskedastic processes with rich specifications of jumps in returns and volatility. We provide a tractable risk neutralization framework for this class of mod-els allowing for option valuation with separate modeling of … Read More »

V. Martinez, I.Rosu and C. Bester, “Option Pricing on Cash Mergers,” (Paper, University of Chicago and Baruch College, September 2009).

Abstract: When a cash merger is announced but not completed, there are two main sources of uncertainty related to the target company: the probability of success and the price conditional on the deal failing. We propose an arbitrage-free option pricing formula that focuses on these sources of uncertainty. We test our formula in a study of all cash mergers between … Read More »

S. Zymler, D. Kuhn, and B. Rustem, “Worst-Case Value-at-Risk of Non-linear Portfolios,” (Working paper, Imperial College London, 18 August 2009).

Abstract: Portfolio optimization problems involving Value-at-Risk (VaR) are often computationally intractable and require complete information about the return distribution of the portfolio constituents, which is rarely available in practice. These difficulties are compounded when the portfolio contains derivatives. We develop two tractable conservative approximations for the VaR of a derivative portfolio by evaluating the worst-case VaR over all return distributions … Read More »

E. Maberly, R. Pierce, and P. Catania, “Threshold Levels, Strike Price Grid and Other Market Microstructure Issues Associated with Exchange Traded Equity Options,” Journal of Futures Markets, Forthcoming.

Abstract: This paper addresses a number of important market microstructure issues associated with exchange traded equity options having significant research implications for studies investigating clustering on option strike prices. Price threshold levels are examined associated with exchange listing and the automatic exercise of equity options as established by the SEC and OCC to carry out their regulatory and oversight responsibilities. … Read More »