JOURNAL ARTICLE

Why Does Volatility Uncertainty Predict Equity Option Returns?

  • Published In: Quarterly Journal of Finance, 2023, v. 13, n. 1. P. 1 1 of 3

  • Database: Business Source Ultimate 2 of 3

  • Authored By: Cao, Jie Jay; Vasquez, Aurelio; Xiao, Xiao; Zhan, Xintong Eunice 3 of 3

Abstract

Delta-hedged option returns consistently decrease in volatility of volatility changes (volatility uncertainty), for both implied and realized volatilities. We provide a thorough investigation of the underlying mechanisms including model-risk and gambling-preference channels. Uncertainty of both volatilities amplifies the model risk, leading to a higher option premium charged by dealers. Volatility of volatility-increases, rather than that of volatility-decreases, contributes to the effect of implied volatility uncertainty, supporting the gambling-preference channel. We further strengthen this channel by examining the effects of option end-users net demand and lottery-like features, and by decomposing implied volatility changes into systematic and idiosyncratic components. [ABSTRACT FROM AUTHOR]

Additional Information

  • Source:Quarterly Journal of Finance. 2023/03, Vol. 13, Issue 1, p1
  • Document Type:Article
  • Subject Area:Business and Management
  • Publication Date:2023
  • ISSN:2010-1392
  • DOI:10.1142/S2010139223500052
  • Accession Number:163601971
  • Copyright Statement:Copyright of Quarterly Journal of Finance is the property of World Scientific Publishing Company and its content may not be copied or emailed to multiple sites without the copyright holder's express written permission. Additionally, content may not be used with any artificial intelligence tools or machine learning technologies. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

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