scholarly journals The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs

2015 ◽  
Vol 41 ◽  
pp. 62-73 ◽  
Author(s):  
Shu Feng ◽  
Yi Zhang ◽  
Geoffrey C. Friesen
Keyword(s):  
Stock Returns ◽  
Implied Volatility ◽  
Heterogeneous Beliefs ◽  
Volatility Smile ◽  
The Relationship

scholarly journals Pricing and hedging Asian options under Levy processes and robust long-term investing with learning about stock returns

2021 ◽  
Author(s):  
Andrew Na
Keyword(s):  
Stock Returns ◽  
Implied Volatility ◽  
Calibration Method ◽  
Recursive Utility ◽  
Asian Options ◽  
Volatility Smile ◽  
Bivariate Model ◽  
Risky Assets ◽  
Fourier Cosine

In this work we propose a parametric model using the techniques of time-changed subordination that captures the implied volatility smile. We demonstrate that the Fourier-Cosine method can be used in a semi-static way to hedge for quadratic, VaR and AVaR risk. We also observe that investors looking to hedge VaR can simply hold the amount in a portfolio of mostly cash, whereas an investor hedging AVaR will need to hold more risky assets. We also extend ES risk to a robust framework. A conditional calibration method to calibrate the bivariate model is proposed. For a robust long-term investor who maximizes their recursive utility and learns about the stock returns, as the willingness to substitute over time increases, the equity demand decreases and consumption-wealth ratio increases. As the preference for robustness increases the demand for risk decreases. For a positive correlation, we observe that learning about returns encourages the investor to short the bond at all levels of u and vice versa

Heterogeneous beliefs and idiosyncratic volatility puzzle: evidence from China

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mao He ◽  
Juncheng Huang ◽  
Hongquan Zhu
Keyword(s):  
Stock Returns ◽  
Trading Volume ◽  
Factor Model ◽  
Heterogeneous Beliefs ◽  
Idiosyncratic Volatility ◽  
Chinese Stock Market ◽  
Content Type ◽  
Volatility Puzzle ◽  
The Relationship ◽  
Idiosyncratic Volatility Puzzle

PurposeThe purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.Design/methodology/approachOur study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.FindingsInvestors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.Originality/valueThe findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.

scholarly journals The impact of the leverage effect on the implied volatility smile: evidence for the German option market

2020 ◽  
Author(s):  
A. W. Rathgeber ◽  
J. Stadler ◽  
S. Stöckl
Keyword(s):  
Stock Returns ◽  
Implied Volatility ◽  
Ad Hoc ◽  
Simulation Studies ◽  
Volatility Smile ◽  
Theoretical Derivation ◽  
Data Set ◽  
Unique Data ◽  
Theoretical Predictions ◽  
The Impact

Abstract It is a widely known theoretical derivation, that the firm’s leverage is negatively related to volatility of stock returns, although the empirical evidence is still outstanding. To empirically evaluate the leverage we first complement previous simulation studies by deriving theoretical predictions of leverage changes on the volatility smile. Even more important, we empirically test these predictions with an event study using intra-day Eurex option data and a unique data set of 138 ad-hoc news. For our theoretically derived predictions we observe that changes in leverage of DAX companies from 1999 to 2014 cause significant changes to the implied volatility smile.

scholarly journals Pricing and hedging Asian options under Levy processes and robust long-term investing with learning about stock returns

2021 ◽  
Author(s):  
Andrew Na
Keyword(s):  
Stock Returns ◽  
Implied Volatility ◽  
Calibration Method ◽  
Recursive Utility ◽  
Asian Options ◽  
Volatility Smile ◽  
Bivariate Model ◽  
Risky Assets ◽  
Fourier Cosine

In this work we propose a parametric model using the techniques of time-changed subordination that captures the implied volatility smile. We demonstrate that the Fourier-Cosine method can be used in a semi-static way to hedge for quadratic, VaR and AVaR risk. We also observe that investors looking to hedge VaR can simply hold the amount in a portfolio of mostly cash, whereas an investor hedging AVaR will need to hold more risky assets. We also extend ES risk to a robust framework. A conditional calibration method to calibrate the bivariate model is proposed. For a robust long-term investor who maximizes their recursive utility and learns about the stock returns, as the willingness to substitute over time increases, the equity demand decreases and consumption-wealth ratio increases. As the preference for robustness increases the demand for risk decreases. For a positive correlation, we observe that learning about returns encourages the investor to short the bond at all levels of u and vice versa

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