The Volatility Risk Premium in the KOSPI200 Index Options

2009 ◽  
Vol 17 (2) ◽  
pp. 67-86
Author(s):  
Hyoung-Jin Park
Keyword(s):  
Risk Premium ◽  
Empirical Method ◽  
Option Prices ◽  
Options Market ◽  
Index Options ◽  
Volatility Risk ◽  
Put Options ◽  
Volatility Risk Premium ◽  
Bid Ask Spread ◽  
Delta Hedging

This study examines whether the volatility risk premium is reflected on the prices of the KOSPI200 index options. By applying the empirical method of Bakshi and Kapadia (2003), we analyze the performance of delta-hedging strategy in the KOSPI200 index market. They showed the existence of the negative volatility risk premium in the S&P 500 index options as well as derived theoretical positive relationship between the volatility risk premium and delta-hedging gains. However, in the results of this study, contrary to those in the S&P 500 index options market, we do not observe the volatility risk premium. Delta-hedged gains of ATM options are not significantly negative. Delta-hedged gains are not more negative as historical volatility increases and as options' vega and remaining maturity increase. However, the notable finding of this study is that delta-hedged gains of OTM options and put options are negative and signigicant. This results can be caused by the phenomenon of overpriced puts or by market microstructure factors, such as relatively wide bid-ask spread and high tick size. In a simple examination of comparison between changes in traded option prices and changes in the Black-Scholes option prices during delta-hedging period, negative delta-hedged gains seem to be attributed to too small changes in call option prices and too large changes in put option prices. In conclusion, by analyzing the delta-hedged gains, the volatility risk risk premium seems not be observed in the KOSPI200 index options market.

The Profitability of Volatility Trading on Exchange-traded Dollar-rupee Options: Evidence of a Volatility Risk Premium?

2021 ◽  
pp. 097215092110461
Author(s):  
Aparna Bhat
Keyword(s):  
Risk Premium ◽  
Options Market ◽  
Market Returns ◽  
Volatility Risk ◽  
Put Options ◽  
Market Makers ◽  
Volatility Risk Premium ◽  
Option Strategies ◽  
Volatility Regimes ◽  
Bid Ask Spreads

This article examines the profitability of short volatility strategies in the exchange-traded USDINR options market. Returns from delta-hedged short positions in straddles, strangles and individual call and put options are examined across different trading horizons and volatility regimes. The study finds that short volatility strategies yield significant mean and median returns regardless of the trading horizon and option moneyness before considering transaction costs. This is suggestive of a volatility risk premium priced in USDINR options. However, the returns are found to be insignificant and even negative after accounting for trading costs such as bid-ask spreads and brokerage. The study concludes that although USDINR options appear to be overpriced because of the volatility risk premium, short option strategies can be profitably exploited only by market makers and institutional investors facing low spreads and funding costs. The findings are suggestive of an informationally efficient market.

Determinants of the Index Straddle Returns

2013 ◽  
Vol 21 (4) ◽  
pp. 411-434
Author(s):  
Byung Jin Kang
Keyword(s):  
Risk Premium ◽  
Trading Strategies ◽  
Excess Returns ◽  
Index Options ◽  
Volatility Risk ◽  
Volatility Risk Premium ◽  
Theoretical View

This paper investigates ATM zero-beta straddle (i.e., ZBS) returns, one of the most widely used volatility trading strategies, and then examines the determinants of them. First, from a point of theoretical view, we find that the determinants of the ZBS returns without rebalancing are different from those with rebalancing. This means that most previous studies overlooking the return characteristics by difference of rebalancing frequency could result in misleading implications. Next, from a point of empirical view, we find that the negative excess returns are also obtained by taking a long position in ZBS on the KOSPI 200 index options, as in most other markets. Even though these negative excess returns are not strongly significant, but they are found to be closely related to the volatility risk premium.

scholarly journals Asymmetric Volatility Risk: Evidence from Option Markets*

2018 ◽  
Vol 23 (4) ◽  
pp. 777-799 ◽  
Author(s):  
Jens Jackwerth ◽  
Grigory Vilkov
Keyword(s):  
Risk Premium ◽  
Option Prices ◽  
Index Options ◽  
Option Markets ◽  
Volatility Risk ◽  
Asymmetric Volatility ◽  
Risk Neutral ◽  
Correlation Risk ◽  
Marginal Risk ◽  
Implied Correlation

Abstract Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions (RNDs) of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate RND cannot be inferred from the marginals, we propose a novel identification based on long-dated index options. We estimate the risk-neutral asymmetric volatility implied correlation (AVIC) and find it to be significantly lower than its realized counterpart. We interpret the economics of the asymmetric volatility correlation risk premium and use AVIC to predict returns, volatility, and risk-neutral quantities.

Is volatility risk priced in the KOSPI 200 index options market?

2009 ◽  
Vol 29 (9) ◽  
pp. 797-825 ◽  
Author(s):  
Sun-Joong Yoon ◽  
Suk Joon Byun
Keyword(s):  
Options Market ◽  
Index Options ◽  
Volatility Risk

scholarly journals Determinants of Violations in the SET50 Index Options Pricing Relationships: Put-Call-Futures Parity and Box Spread Tests

2018 ◽  
Vol 14 (3) ◽  
pp. 1 ◽  
Author(s):  
Woradee Jongadsayakul
Keyword(s):  
Transaction Costs ◽  
Risk Premium ◽  
Tobit Model ◽  
Options Pricing ◽  
Options Market ◽  
Index Options ◽  
Exercise Price ◽  
Daily Data ◽  
Before And After ◽  
Contract Specification

Although SET50 Index Options, the only option product on Thailand Futures Exchange, has been traded since October 29, 2007, it has faced the liquidity problem. The SET50 Index Options market must offer a risk premium to compensate investors for liquidity risk. It may cause violations in options pricing relationships. This research therefore uses daily data from October 29, 2007 to December 30, 2016 to compare the violations in SET50 Index Options pricing relationships before and after change in contract specification on October 29, 2012 and investigate determinants of these violations using Tobit model. Two tests of SET50 Index Options pricing relationships, Put-Call-Futures Parity and Box Spread, are employed. The test results of Put-Call-Futures Parity show that the percentage and baht amount of violations in many cases are greater in the period before the modification of SET50 Index Options. Without transaction costs, we also see more Box Spread violations before contract adjustment. However, after taking transaction costs into account, there are more percentage and baht amount of Box Spread violations in the later time period. The estimation of Tobit model shows that the violation sizes of both Put-Call-Futures Parity and Box Spread, excluding transaction costs, depend on the liquidity of SET50 Index Options market measured by option moneyness and open interest. The SET50 Index Options contract specification, especially exercise price, also significantly affects the size of violations, though the direction of a relationship is not cleared.

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