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 »