Financial & investment strategies to captivate S&P 500 volatility premium
-
DOIhttp://dx.doi.org/10.21511/imfi.14(3).2017.04
-
Article InfoVolume 14 2017, Issue #3, pp. 39-53
- Cited by
- 1437 Views
-
454 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
So as to enhance the risk of balanced execution of their portfolios, speculators look to broaden by including new resources, new sorts of monetary instruments or even new resource classes. Like wares, volatility rose as an unmistakable resource class and included the speculation portfolios particularly by multifaceted investments.
This paper examines the volatility premium of S&P 500 record choices and contrasts with different venture methodologies in view of offering alternative structures, for example, straddles and strangles utilizing diverse measures or risk and return. The outcomes demonstrate that the speculation procedures used to catch the instability premium through offering choices structures give higher exhibitions contrasted with the S&P 500 benchmark index.
- Keywords
-
JEL Classification (Paper profile tab)G11, G31, G32
-
References35
-
Tables3
-
Figures7
-
- Figure 1. Evolution of S& P 500 index and implied volatility VIX
- Figure 2. Evolution of implied volatility VIX and one month realized volatility
- Figure 3. Evolution of 1 month volatility premium
- Figure 4. Evolution of absolute and relative volatility
- Figure 5. Evolution in the value of the investments based on 6M options
- Figure 6. Implied volatility (VIX) scenario for all coefficients
- Figure 7. Implied volatility (VIX) as a part of the initial scenario for all volatility coefficients.
-
- Table 1. Descriptive statistics of stock returns
- Table 2. Measures of risk and return (6M option)
- Table 3. Results of sensitivity analysis run for the 6M options based strategies
-
- Avellaneda, M., Zhu, Y. (1998). A risk-neutral stochastic volatility model. International Journal of Theoretical and Applied Finance, 1, 289-310.
- Baele, L., Driessen, J., Londono, J. M., Spalt, O. G. (2014). Cumulative prospect theory and the variance premium (Unpublished working paper). Tilburg University.
- Bakshi, G., & Kapadia, N. (2003a). Delta-Hedged Gains and the Negative Market Volatility Risk Premium. Review of Financial Studies, 16, 527-566.
- Bakshi, G., Kapadia, N. (2003c). Volatility risk premium embedded in individual equity options: some new insights. Journal of Derivatives, 11, 45-54.
- Birkelund, O. H., Haugom, E., Molnár, P., Opdal, M., & Westgaard, S. (2015). A comparison of implied and realized volatility in the Nordic power forward market. Energy Economics, 48, 288-294.
- Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637-654.
- Bollerslev, T., Tauchen, G., Zhou, H. (2009). Expected stock returns and variance risk premia. Review of Financial Studies, 22, 4463-4492.
- Buraschi, A., & Jackwerth, J. (2001). The Price of a Smile: Hedging and Spanning in Option Markets. Review of Financial Studies, 14, 495-527.
- Carr, P., Wu, L. (2006). A tale of two indices. Journal of Derivatives, 13, 13-29.
- Carr, P., & Wu, L. (2009). Variance Risk Premiums. Review of Financial Studies, 22(3), 1311- 1341.
- Christensen, B. J., & Prabhala, N. R. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125-150.
- Coval, J. D., & Shumway, T. (2001). Expected Option Returns. The Journal of Finance, 56(3), 983- 1009.
- Daglish, T., Hull, J., Suo, W. (2007). Volatility surfaces: theory, rules of thumb, and empirical evidence. Quantitative Finance, 7, 507-524.
- Drechsler, I., Yaron, A. (2011). What’s vol got to do with it. Review of Financial Studies, 24, 1-45.
- Driessen, J., & Maenhout, P. (2013). The world price of jump and volatility risk. Journal of Banking & Finance, 37(2), 518-536.
- Egloff, D., Leippold, M., Wu, L. (2010). The term structure of variance swap rates and optimal variance swap investments. Journal of Financial and Quantitative Analysis, 45, 1279- 1310.
- Engle, R., Figlewski, S. (2015). Modeling the dynamics of correlations among implied volatilities. Review of Finance, 19, 991-1018.
- Eraker, B. (2009). The volatility premium (Technical report, Working paper).
- Fengler, M. R. (2005). Semiparametric Modeling of Implied Volatility. Springer-Verlag, Berlin.
- Garefalakis, A., Dimitras, A., Koemtzopoulos, D., Spinthiropoulos, K. (2011). Determinants factors of Hong Kong stock market. International Research Journal of Finance and Economics, 62, 50-60.
- Garefalakis, A., Mantalis, G., Lemonakis, C., Spinthiropoulos, K., (2016a). Determinants of profitability in aviation industry of Europe and America. International Journal of Supply Chain Management, 5(2), 131-137.
- Garefalakis, A., Mantalis, G., Vourgourakis, E., Spinthiropoulos, K., & Lemonakis, C., (2016b). Healthcare Firms and the ERP Systems. Journal of Engineering Science and Technology Review, 9(1), 139-144.
- Garefalakis A., Dimitras, A., Lemonakis, C. (2017). The effect of Corporate Governance Information (CGI) on Banks’ reporting performance. Investment Management and Financial Innovations (IMFI) 14(2), 63-70.
- Heath, D., Jarrow, R., Morton, A. (1992). Bond pricing and the term structure of interest rates: a new technology for contingent claims valuation. Econometrica, 60, 77-105.
- Hodges, H. M. (1996). Arbitrage bounds of the implied volatility strike and term structures of European-style options. Journal of Derivatives, 3, 23-32.
- Jiang, G., Tian, Y. (2005). Model-free implied volatility and its information content. Review of Financial Studies, 18, 1305-1342.
- Jones, C. (2001). A Nonlinear Factor Analysis of S&P 500 Index Option Returns? Manuscript, University of Rochester.
- Ledoit, O., Santa-Clara, P. (1998). Relative pricing of options with stochastic volatility (Unpublished working paper). University of California, Los Angeles.
- Lemonakis, C., Vassakis, K., Garefalakis, A., Papa, P. (2016). SMEs performance and subsidies in it investments: A vis-à-vis approach. Journal of Theoretical and Applied Information Technology, 87(2), 266-275.
- Merton, R. C. (1973). Theory of Rational Option Pricing. The Bell Journal of Economics and Management Science, 4(1), 141.
- Mueller, P., Vedolin, A., Yen, Y.-M. (2012). Bond variance risk premia (Working paper). London School of Economics.
- Pan, J. (2002). The Jump-Risk Premia Implicit in Options: Evidence from an Integrated Time-Series Study? Journal of Financial Economics, 63, 3-50.
- Schonbucher, P. J. (1999). A market model for stochastic implied volatility. Philosophical Transactions: Mathematical, Physical and Engineering Sciences, 357, 2071-2092.
- Trolle, A. B., Schwartz, E. S., Balbas, A., Brennan, M., Cartea, A., Crouhy, M., Tjur, T. (n.d.). Variance risk premia in energy commodities.
- Zhang, B. Y., Zhou, H., Zhu, H. (2009). Explaining credit default swap spreads with the equity volatility and jump risks of individual firms. Review of Financial Studies, 22, 5099-5131.