Variance Premium and Implied Volatility in a Low-Liquidity Option Market
Autor(a) principal: | |
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Data de Publicação: | 2017 |
Outros Autores: | , , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Revista Brasileira de Economia (Online) |
Texto Completo: | http://old.scielo.br/scielo.php?script=sci_arttext&pid=S0034-71402017000100003 |
Resumo: | We propose an implied volatility index for Brazil that we name "IVol-BR". The index is based on daily market prices of options over Ibovespa-an option market with relatively low liquidity and few option strikes. Our methodology combines standard international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option markets. We do a number of empirical tests to validate the IVol-BR. First, we show that the IVol-BR has significant predictive power over future volatility of equity returns not contained in traditional volatility forecasting variables. Second, we decompose the squared IVol-BR into (i) the expected variance of stock returns and (ii) the equity variance premium. This decomposition is of interest since the equity variance premium directly relates to the representative investor risk aversion. Finally, assuming Bollerslev, Tauchen, & Zhou (2009) functional form, we produce a time-varying risk aversion measure for the Brazilian investor. We empirically show that risk aversion is positively related to expected returns, as theory suggests. |
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Revista Brasileira de Economia (Online) |
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Variance Premium and Implied Volatility in a Low-Liquidity Option MarketVolatility IndexPredictabilityRisk AversionEquity Variance PremiumWe propose an implied volatility index for Brazil that we name "IVol-BR". The index is based on daily market prices of options over Ibovespa-an option market with relatively low liquidity and few option strikes. Our methodology combines standard international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option markets. We do a number of empirical tests to validate the IVol-BR. First, we show that the IVol-BR has significant predictive power over future volatility of equity returns not contained in traditional volatility forecasting variables. Second, we decompose the squared IVol-BR into (i) the expected variance of stock returns and (ii) the equity variance premium. This decomposition is of interest since the equity variance premium directly relates to the representative investor risk aversion. Finally, assuming Bollerslev, Tauchen, & Zhou (2009) functional form, we produce a time-varying risk aversion measure for the Brazilian investor. We empirically show that risk aversion is positively related to expected returns, as theory suggests.Fundação Getúlio Vargas2017-03-01info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersiontext/htmlhttp://old.scielo.br/scielo.php?script=sci_arttext&pid=S0034-71402017000100003Revista Brasileira de Economia v.71 n.1 2017reponame:Revista Brasileira de Economia (Online)instname:Fundação Getulio Vargas (FGV)instacron:FGV10.5935/0034-7140.20170001info:eu-repo/semantics/openAccessAstorino,Eduardo SanchezChague,FernandoGiovannetti,BrunoSilva,Marcos Eugênio daeng2018-09-04T00:00:00Zoai:scielo:S0034-71402017000100003Revistahttp://bibliotecadigital.fgv.br/ojs/index.php/rbe/issue/archivehttps://old.scielo.br/oai/scielo-oai.php||rbe@fgv.br1806-91340034-7140opendoar:2018-09-04T00:00Revista Brasileira de Economia (Online) - Fundação Getulio Vargas (FGV)false |
dc.title.none.fl_str_mv |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
title |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
spellingShingle |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market Astorino,Eduardo Sanchez Volatility Index Predictability Risk Aversion Equity Variance Premium |
title_short |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
title_full |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
title_fullStr |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
title_full_unstemmed |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
title_sort |
Variance Premium and Implied Volatility in a Low-Liquidity Option Market |
author |
Astorino,Eduardo Sanchez |
author_facet |
Astorino,Eduardo Sanchez Chague,Fernando Giovannetti,Bruno Silva,Marcos Eugênio da |
author_role |
author |
author2 |
Chague,Fernando Giovannetti,Bruno Silva,Marcos Eugênio da |
author2_role |
author author author |
dc.contributor.author.fl_str_mv |
Astorino,Eduardo Sanchez Chague,Fernando Giovannetti,Bruno Silva,Marcos Eugênio da |
dc.subject.por.fl_str_mv |
Volatility Index Predictability Risk Aversion Equity Variance Premium |
topic |
Volatility Index Predictability Risk Aversion Equity Variance Premium |
description |
We propose an implied volatility index for Brazil that we name "IVol-BR". The index is based on daily market prices of options over Ibovespa-an option market with relatively low liquidity and few option strikes. Our methodology combines standard international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option markets. We do a number of empirical tests to validate the IVol-BR. First, we show that the IVol-BR has significant predictive power over future volatility of equity returns not contained in traditional volatility forecasting variables. Second, we decompose the squared IVol-BR into (i) the expected variance of stock returns and (ii) the equity variance premium. This decomposition is of interest since the equity variance premium directly relates to the representative investor risk aversion. Finally, assuming Bollerslev, Tauchen, & Zhou (2009) functional form, we produce a time-varying risk aversion measure for the Brazilian investor. We empirically show that risk aversion is positively related to expected returns, as theory suggests. |
publishDate |
2017 |
dc.date.none.fl_str_mv |
2017-03-01 |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://old.scielo.br/scielo.php?script=sci_arttext&pid=S0034-71402017000100003 |
url |
http://old.scielo.br/scielo.php?script=sci_arttext&pid=S0034-71402017000100003 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
10.5935/0034-7140.20170001 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
text/html |
dc.publisher.none.fl_str_mv |
Fundação Getúlio Vargas |
publisher.none.fl_str_mv |
Fundação Getúlio Vargas |
dc.source.none.fl_str_mv |
Revista Brasileira de Economia v.71 n.1 2017 reponame:Revista Brasileira de Economia (Online) instname:Fundação Getulio Vargas (FGV) instacron:FGV |
instname_str |
Fundação Getulio Vargas (FGV) |
instacron_str |
FGV |
institution |
FGV |
reponame_str |
Revista Brasileira de Economia (Online) |
collection |
Revista Brasileira de Economia (Online) |
repository.name.fl_str_mv |
Revista Brasileira de Economia (Online) - Fundação Getulio Vargas (FGV) |
repository.mail.fl_str_mv |
||rbe@fgv.br |
_version_ |
1754115905910996992 |