On profitability of volatility trading on S&P 500 equity index options: The role of trading frictions

This study examines the information content of implied volatility, using the options of the underlying S&P CNX Nifty index. In this study, implied, historical and realized volatilities are calculated using non-overlapping monthly at-the-money samples. The study covers the period from introduction of options on the derivative segment of NSE, June 2001 to May 2011. The results reveal that call and put implied volatility of S&P CNX Nifty index option does contain information about future realized return volatility. This study accounts for the problem of error-in-variable and controls for it by using the instrumental variable technique. In the 2SLS estimation, the Hausman H-statistic shows that call implied volatility is measured with error. Hence, 2SLS coefficients are more consistent than the OLS estimates. Results of this study might prove to be helpful to the volatility traders in volatility forecasting and option pricing.

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PRICE ANDVOLUME EFFECTS ASSOCIATED WITH CHANGES IN THE LQ 45 INDEX AND THE MSCI EQUITY INDEX LISTS

Gadjah Mada International Journal of Business ◽

10.22146/gamaijb.5631 ◽

2003 ◽

Vol 5 (3) ◽

pp. 401

Author(s):

A. Harijono

Keyword(s):

Institutional Investors ◽

Trading Volume ◽

Stock Exchange ◽

Share Price ◽

Rule Based ◽

Developed Markets ◽

Portfolio Managers ◽

Index Changes ◽

Equity Index

This paper examines price and trading volume behavior surrounding announcements of changes in the composition of the liquidity (LQ) 45 and the Morgan Stanley Capital International (MSCI) Equity Index at the Jakarta Stock Exchange. Unlike listing studies in the developed markets, the announcements of the LQ45 Index changes have no impact on share price and trading volume. This may be due to the small role of Indonesian domestic institutional investors and purely rule-based characteristics of the LQ45 Index. On the contrary, the markets do respond to the changes in Indonesian stocks composition of the MSCI Equity Index. It seems that global portfolio managers, who dominate trading at the Jakarta Stock Exchange, rebalanced their portfolio when the changes in the MSCI Equity Index occurred because their performances are generally benchmarks to the return on the Index.

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Risk Arbitrage Opportunities for Stock Index Options

Operations Research ◽

10.1287/opre.2020.2012 ◽

2020 ◽

Author(s):

Thierry Post ◽

Iňaki Rodríguez Longarela

Keyword(s):

Abnormal Returns ◽

Stock Index ◽

Small Scale ◽

Option Prices ◽

Index Options ◽

Arbitrage Opportunities ◽

Data Limitations ◽

Out Of Sample ◽

Risk Arbitrage ◽

Equity Index

Research about equity index options has shown that option prices systematically violate rational pricing bounds for the risk-averse representative investor. These results raise the question of whether profitable trading possibilities exist in this market. Standard portfolio optimization does not apply because of the large bid-ask spreads and low quote sizes in this market. Motivated by these complications, a system of linear inequalities is developed that completely characterizes all risk arbitrage opportunities in the presence of transaction costs and portfolio restrictions. The practical use of this system is illustrated with an application to front-month S&P500 stock index options. Small-scale portfolios seem to produce surprisingly large abnormal returns out of sample; outperformance, however, seems elusive for institutional investors because of the limited quote size, possibly reflecting data limitations.

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