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Volatility information in index option demand


Puhan, Tatjana-Xenia (2014). Volatility information in index option demand. SSRN 2277689, University of Zurich.

Abstract

This paper provides evidence that demand for equity index options has predictive power for
future volatility beyond current and lagged volatility in publicly available data. The predictive power increases prior to macroeconomic announcements and exhibits a positive relation with investor uncertainty about macroeconomic news. Straddle positions that trade on the volatility informed index option demand yield annualized Sharpe Ratios that are up to twice as large as the Sharpe Ratios on a long index investment. Sharpe Ratios increase with the amount of volatility informed trading in the options market. In times of high volatility, the demand for
straddle positions contains significantly more information and has an impact on option liquidity levels.

Abstract

This paper provides evidence that demand for equity index options has predictive power for
future volatility beyond current and lagged volatility in publicly available data. The predictive power increases prior to macroeconomic announcements and exhibits a positive relation with investor uncertainty about macroeconomic news. Straddle positions that trade on the volatility informed index option demand yield annualized Sharpe Ratios that are up to twice as large as the Sharpe Ratios on a long index investment. Sharpe Ratios increase with the amount of volatility informed trading in the options market. In times of high volatility, the demand for
straddle positions contains significantly more information and has an impact on option liquidity levels.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:3 May 2014
Deposited On:20 Feb 2015 09:39
Last Modified:15 Aug 2017 23:56
Series Name:SSRN
Number of Pages:36
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2277689
Other Identification Number:merlin-id:9538

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