Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options

2009 ◽  
Vol 38 (5) ◽  
pp. 773-800 ◽  
Author(s):  
Bing-Huei Lin ◽  
Yin-Jung Chen
Keyword(s):  
Risk Premium ◽  
Market Volatility ◽  
Index Options ◽  
Volatility Risk ◽  
Volatility Risk Premium ◽  
Equity Index

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.

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.

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