Baeho Kim, CDAR Visiting Researcher, to present at FMA International’s 2016 Annual Meeting A Smiling Bear in the Equity Options Market and the Cross-section of Stock Returns Abstract: We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of excess tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual U.S.-listed stocks during 2000-2013, we find that the average return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate that informed options traders anticipating heavier tail risk proactively induce leptokurtic implied distributions of underlying stock returns before equity investors express their tail-risk aversion.
- Start date: 2016-10-19 08:00:00
- End date: 2016-10-22 17:00:00
- Website: http://www.fma.org/Vegas/VegasRegStepOne.htm
- Venue: Rio Suites Hotel
- Address: Las Vegas, NV
- Website: http://www.fma.org/