Click to login and read the full article.
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600
Abstract
As research is revealing more detail about the behavior of implied volatilities, the empirical evidence points to important differences between systematic volatility, that is correlated with the market index and is shared broadly across stocks, and idiosyncratic volatility that is largely independent of the rest of the market. It is the former that appears to command a significant variance risk premium in market prices. Marks and Simon examine an intermediate case: options on sector exchange traded funds. The underlying asset for an ETF is a portfolio of stocks within a single market sector. That is, the underlying is an index not a single stock, so volatility risk is somewhat systematic, but to the extent there is an important industry component to variance, it might behave more like single-stock idiosyncratic risk than like market risk. The results show a rich array of volatility effects, both in terms of different risk premia on different types of volatility, but also in terms of the speed of adjustment of sector IVs that appear to revert toward a relatively constant long term average relationship with systematic risk after deviating from it temporarily. Among other interesting results in the study: both market and sector IVs respond to realized returns, but sector “idiosyncratic” IVs are more symmetrical in responding to positive and negative returns; however, the impact of a negative return appears immediately, while sector IVs respond more slowly to positive returns. Overall, the article provides new evidence showing the rich structure of implied volatility dynamics.
TOPICS: Options, exchange-traded funds and applications, analysis of individual factors/risk premia, quantitative methods
- © 2017 Pageant Media Ltd
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600