Changes In Implied Volatility Research Articles

Asymmetry in option implied volatility and yield: Evidence from China's ETF options market ,

This paper analyzes the changes in implied volatility and positive/negative returns of options using data from the China 50 ETF options and the CSI 300 ETF options. We employs quantile regression and least squares methods to explore the asymmetry between volatility and returns in the Chinese options market under different market capacities and time periods. The study reveals significant volatility-return asymmetry in both the China 50 ETF and the CSI 300 ETF markets, indicating that negative returns have a stronger impact on implied volatility changes than positive returns during the same period. Additionally, in both markets, the lagged changes in implied volatility are found to be an important determinant of current implied volatility changes. Differences in the underlying assets covered by the options and investor structures may influence the mechanisms of implied volatility changes and the asymmetry between volatility and returns. Furthermore, since the outbreak of the pandemic, investors' sensitivity and caution toward market information may weaken the asymmetry between volatility and returns.

Contemporaneous dependence between euro, crude oil, and gold returns and their respective implied volatility changes. Evidence from the local Gaussian correlation approach

PurposeThis study aims to assess the contemporaneous dependence between euro, crude oil and gold returns and their respective implied volatility changes.Design/methodology/approachThe empirical analysis relies on daily data for the period 2015–2022 and the local Gaussian correlation (LGC) approach that is suitable for estimating dependence between two stochastic processes at any point of their joint distribution.Findings(a) The global correlation coefficients are negative for the euro and crude oil and positive for gold, implying that in the first two markets’ traders are more concerned with sudden price downswings while in the third with sudden upswings. (b) The detailed local analysis, however, shows that traders 2019 attitudes may change with the underlying state of the market and that risk reversals are more likely to occur at the upper extremes of the joint distributions. (c) The pattern of dependence between price returns and implied volatility changes is asymmetric.Originality/valueTo the best of the author’s knowledge, this is the first work that uses the highly flexible LGC approach to analyze the link between price returns and implied volatility changes either in stock or in commodities futures markets. The empirical results provide useful insights into traders’ risk attitudes in different market states.

Whose sentiment explains implied volatility change and smile?

This letter examines the relationship between investor sentiment and options-implied volatility (IV) dynamics using a high-quality intraday dataset. By classifying each trade by investor type and moneyness, we find that sentiment affects intraday IV changes and explains IV structures and anomalies. Domestic individuals’ sentiment is highly related to implied volatility changes and has a more significant effect on out-of-the-money options that noisy individual investors heavily trade.

Why Does Volatility Uncertainty Predict Equity Option Returns?

Delta-hedged option returns consistently decrease in volatility of volatility changes (volatility uncertainty), for both implied and realized volatilities. We provide a thorough investigation of the underlying mechanisms including model-risk and gambling-preference channels. Uncertainty of both volatilities amplifies the model risk, leading to a higher option premium charged by dealers. Volatility of volatility-increases, rather than that of volatility-decreases, contributes to the effect of implied volatility uncertainty, supporting the gambling-preference channel. We further strengthen this channel by examining the effects of option end-users net demand and lottery-like features, and by decomposing implied volatility changes into systematic and idiosyncratic components.

Implied Volatility Changes and Corporate Bond Returns

Corporate bonds with large increases in implied volatility over the past month underperform those with large decreases in implied volatility by 0.6% per month. In contrast to existing studies that show implied volatility changes carry information about fundamental news, our evidence suggests that implied volatility changes contain information about uncertainty shocks to the firm. Our results are consistent with the notion that informed traders with new information about firm risk prefer to trade in the option market and the corporate bond market underreacts to this information. This paper was accepted by Haoxiang Zhu, finance. Funding: We thank the Canadian Derivatives Institute for financial support. J. Cao and X. Zhan acknowledge generous financial support of the Research Grant Council of the Hong Kong Special Administrative Region, China [Grants GRF 14501720, 14500919]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4379 .

Macroeconomic Attention and Announcement Risk Premia

Abstract We construct macroeconomic attention indexes (MAI), which are new measures of attention to different macroeconomic risks, including unemployment and monetary policy. Individual MAI tend to increase around related announcements and following changes in related fundamentals. Further, bad news raises attention more than good news. For unemployment and FOMC, attention predicts announcement risk premiums and implied volatility changes with large economic magnitudes. Our findings support theories of endogenous attention and announcement risk premiums, while demonstrating future research directions, including that announcements can raise new concerns. Macroeconomic announcements are important not only for contents and timing but also for attention. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Re-examining the leverage effect and gold's safe haven properties with the utilization of the implied volatility of gold: a non-parametric quantile regression approach.

Gold as a tradable financial asset has acquired the reputation of a safe haven from market turbulence. The objective of this study is to investigate empirically the relationship between gold prices and implied volatility in the futures markets of gold, re-examine the leverage hypothesis and attempt to make inferences about gold’s safe haven properties. In doing so, it utilizes the recently developed econometric tool of non-parametric quantile regressions. This is the first work to apply the flexible non-parametric quantile regressions on the exchange-traded funds (ETFs) of gold. The data used are daily returns of options of gold shares and implied volatility changes from June of 2008 to December of 2018. The empirical findings indicate that, for the total sample period as well as for almost all of the five sub-periods examined, changes in the implied volatility of gold are insensitive, and not statistically significant, to changes in the price returns of gold. The leverage hypothesis holds for a wide range in the third sub-period. Accordingly, investors in other ETFs (currency or oil) may choose to use gold as shelter during (extreme) economic downturns.Supplementary InformationThe online version contains supplementary material available at 10.1007/s43546-021-00092-3.

Risk management and corporate social responsibility

AbstractResearch SummaryWe introduce an innovative method of identifying the risk‐management benefit of corporate social responsibility (CSR). Option‐implied volatility captures the financial markets' expectations of a firm's future risk, so if CSR is related to risk‐management benefits, it should be related to lower implied volatility. We find that CSR is associated with low implied volatility and that CSR's insurance benefit is larger for firms that have high leverage, growth opportunities, or uncertainty. However, CSR as an insurance mechanism is less beneficial to firms that are already sound (i.e., those that have high market value and good accounting and financial performance). The results reveal the “terms” of a CSR‐as‐insurance contract, confirm that CSR creates risk‐management benefits, and suggest that financial markets price this benefit in economically significant ways.Managerial SummaryWe suggest a practical technique of evaluating a firm's CSR policy. For example, a manager would simply check how a firm's implied volatility changes as its CSR policy changes. Or, the manager can compare a firm's and its comparable firms' implied volatilities to knowhow financial markets perceive the firm's CSR differently. Option implied volatilities could guide a firm to identify proper CSR‐based risk‐management policies because they have the advantage of being ex ante, real‐time, and objectively observable market‐pricing information in identifying the risk‐management benefit of CSR. Our results also illustrate how a financial expert can use the valuable insight of strategic management literature about CSR‐as‐insurance to price derivative contracts.

Implied volatility indices – A review

This study tests and documents the information content of all publicly available implied volatility indices regarding both the realized volatility and the returns of the underlying asset. These topics present a path traveled by earlier work, but there are gains in studying together all 47 volatility-based indices that are now available, in order to examine if different asset classes and financial instruments could possess different return-volatility relations and forecasting ability.Our findings suggest that implied volatility includes information about future volatility beyond that contained in past volatility; this finding is consistent across all assets under review. Furthermore, we find a significant contemporaneous relationship between implied volatility changes and underlying returns, but at the same time, we show that implied volatilities in commodities, bonds, currencies and volatility react differently to underlying price changes compared to equities. Hence, our findings have important implications for asset allocation, risk management and asset pricing.

Crude oil price and implied volatility

Purpose The purpose of this study is to investigate empirically the pattern of co-movement between prices and implied volatility in the future markets for crude oil. Design/methodology/approach The tool of non-parametric quantile regression is applied to daily price returns and implied volatility changes from 2007 to 2018. Findings For the total sample period, the link between price returns and forward-looking volatility expectations is contemporaneous, negative and asymmetric, and it exhibits an (approximately) inverted U-shaped pattern suggesting that: the pricing of implied volatility is heavier for large (in absolute value terms) changes relative to small ones and it is lighter for large positive changes relative to large negative ones. The pattern of co-movement, therefore, appears to be in line with the theoretical postulates of fear, exuberance and loss aversion. The main characteristics of the relationship are present in some (but not in all) sub-periods, which are also considered in this study. Originality/value Less than a handful of works have assessed the link between implied volatility and prices for commodity ETFs. This is the first one relying on flexible non-parametric quantile regressions.

Implied Volatility Changes and Corporate Bond Returns

Corporate bonds with large increases in implied volatility over the past month underperform those with large decreases in implied volatility by 0.6% per month. In contrast to An, Ang, Bali, and Cakici (2014) who show that implied volatility changes carry information about fundamental news, our evidence suggests that implied volatility changes contain information about uncertainty shocks to the firm. Our results are consistent with the notion that informed traders with new information about firm risk prefer to trade in the option market, and that the corporate bond market under-reacts to this information.

Implied Volatility Changes as Evidence of Stock Price Disequilibrium

Past works have documented the predictive power of short-term stock return momentum and option volume ratios for future stock returns. In this article, the authors find option volume ratios have greater power to predict future returns when evidence exists that prices are out of equilibrium, proxied for by increases in implied volatility. In the studied sample, short-term momentum has significant power to predict future stock returns only in the presence of evidence prices are out of equilibrium. The authors document that option volume ratios, changes in option implied volatility, and short-term momentum together have significant predictive power for the cross-section of stock returns in subsequent periods. The difference between firms predicted to be strong performers and those predicted to be weak performers is more than 1% a month. Buy-and-hold returns for an equally weighted portfolio of predicted strong performers are 249% over the 1996–2009 period compared with a loss of 38% for predicted weak performers. S&P 500 Index returns over the same period were 60%.

Implied Volatility Changes as Evidence of Stock Price Disequilibrium

Implied Volatility Changes as Evidence of Stock Price Disequilibrium

A Comparison of Overreactions of REIT and Non-REIT Funds Using Options Data: The Role of the Financial Crisis

Using Stein’s (1989) methodology, we compare changes in option implied volatilities of two real estate investment trust (REIT) funds and four non-REIT funds. Results indicate that before the 2007-2009 financial crisis, strengths of reactions to information of a liquid REIT fund and a financial fund are less pronounced than other funds analyzed and the markets for the two funds are considered underreaction. However, during and after the crisis the two funds have the strongest degree of overreaction. A possible explanation is that a higher degree of leverage and regulation uncertainties make REIT and financial sectors vulnerable to extreme downturns. Key words: REITs, option valuation, volatility mean reversion, overreaction

Implied Volatility Around the World: Geographical Markets and Asset Classes

This study analyzes the implied volatility-return relationship across asset classes, geographical regions, and time, which extends efforts documenting the instantaneous relation between implied volatility changes and index returns. Modeling the relationships as a GARCH process with lagged terms, we confirm that implied volatility depends on the immediate index changes. However, contemporaneous volatility changes are also explained by lagged index returns and past volatility moves. While this short-term volatility behavior is heavily asymmetric on the side of negative moves, in the long-term there is indifference between positive and negative moves. Volatility also appears to transfer from larger, primary markets to smaller, secondary markets, as price moves in larger markets explain a large portion of volatility in smaller markets. Volatility in larger markets also transfers to the commodity and currency markets.

Relationship of the Change in Implied Volatility with the Underlying Equity Index Return in Thailand

The main purpose of this study is to examine the relationship between the change in implied volatility index and the underlying stock index return. The dataset used in this study is from 11/19/2010 to 12/27/2013. The regression analysis is performed on stationary series. The empirical results reveal that there is evidence of a significantly negative and asymmetric relationship between the return and the change in implied volatility in the Thai stock market. The finding in this study gives implication for risk management.

The reactive volatility model

We present a new volatility model, simple to implement, that includes a leverage effect whose return-volatility correlation function fits to empirical observations. This model is able to capture both the "retarded effect" induced by the specific risk, and the "panic effect", which occurs whenever systematic risk becomes the dominant factor. Consequently, in contrast to a GARCH model and a standard volatility estimate from the squared returns, this new model is as reactive as the implied volatility: the model adjusts itself in an instantaneous way to each variation of the single stock price or the stock index price and the adjustment is highly correlated to implied volatility changes. We also test the reactivity of our model using extreme events taken from the 470 most liquid European stocks over the last decade. We show that the reactive volatility model is more robust to extreme events, and it allows for the identification of precursors and replicas of extreme events.

The Information Content of Option-Based Forecasts of Volatility: Evidence from the Italian Stock Market

The aim of this paper is to comprehensively compare option-based measures of volatility, with the ultimate plan of devising a new volatility index for the Italian stock market. The performance of the different implied volatility measures in forecasting future volatility is evaluated both in a statistical and in an economic setting. The properties of the implied volatility measures are also explored, by looking at both the contemporaneous relationship between implied volatility changes and market returns and the usefulness of the proposed index in forecasting future market returns. The results of the paper are of practical importance for both policy-makers and investors. The volatility index, based on corridor measures, could be used to forecast market volatility, for value at risk purposes, in order to determine trading strategies on the underlying index and as an early warning for future market conditions.

What Can We Learn from the Option Market About the Post-Earnings Announcement Drift?

The Post-Earnings Announcement Drift (PEAD) anomaly refers to the tendency of stock prices to continue drifting in the same direction as earnings surprises well through the subsequent earnings announcements; ignoring the autocorrelations in extreme earnings surprises across adjacent quarters. Currently, the two major competing theories to explain PEAD are: the risk premium hypothesis (RPH), which argues that the anomaly exists only because risk has been measured improperly; and, the under-reaction (behavioral) hypothesis (URH), which assumes investors do not completely utilize the auto-correlations of earnings surprises. We test the former (RPH) by using a finer metric for risk than used in prior research, namely, the change in implied volatilities obtained from options prices immediately before and after the earnings announcements. Inconsistent with the predictions of RPH: (1) we do not find a positive correlation between the implied volatility changes and earnings surprises; and (2) we find that implied volatilities (risk) actually decrease most after the earnings announcements for firms with the most positive earnings surprises. Using volatility based option trading strategies (straddles), we examine if option traders have a similar URH bias to those of equity traders. We find that option straddles based on extreme earnings surprises in the prior quarter are not more profitable than straddles on mild earnings surprises, indicating that option traders already incorporate the prior earnings surprise in option prices.

Asymmetric dependence patterns in financial time series

This article proposes a new copula-based approach to test for asymmetries in the dependence structure of financial time series. Simply splitting observations into subsamples and comparing conditional correlations lead to spurious results due to the well-known conditioning bias. Our suggested framework is able to circumvent these problems. Applying our test to market data, we statistically confirm the widespread notion of significant asymmetric dependence structures between daily changes of the VIX, VXN, VDAXnew, and VSTOXX volatility indices and their corresponding equity index returns. A maximum likelihood method is used to perform a likelihood ratio test between the ordinary t-copula and its asymmetric extension. To the best of our knowledge, our study is the first empirical implementation of the skewed t-copula to generate meta-skewed Student's t-distributions. Its asymmetry leads to significant improvements in the description of the dependence structure between equity returns and implied volatility changes.