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: | https://periodicos.fgv.br/rbe/article/view/59368 |
Resumo: | We propose an implied volatility index for Brazil (called "IVol-BR"), based on daily market prices of options over IBOVESPA - an option market with relatively low liquidity and low number of option strikes. Our methodology combines usual international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option market. 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, we show empirically that higher risk-aversion is accompanied with higher expected returns, confirming the theory that high risk-aversion should be compensated by higher returns. |
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Revista Brasileira de Economia (Online) |
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Variance Premium and Implied Volatility in a Low-Liquidity Option MarketIVol-BRimplied volatilityvariance premiumrisk-aversionWe propose an implied volatility index for Brazil (called "IVol-BR"), based on daily market prices of options over IBOVESPA - an option market with relatively low liquidity and low number of option strikes. Our methodology combines usual international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option market. 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, we show empirically that higher risk-aversion is accompanied with higher expected returns, confirming the theory that high risk-aversion should be compensated by higher returns.EGV EPGE2017-05-18info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersionArticlesArtigosapplication/pdfhttps://periodicos.fgv.br/rbe/article/view/59368Revista Brasileira de Economia; Vol. 71 No. 1 (2017): JAN-MAR; 3-28Revista Brasileira de Economia; v. 71 n. 1 (2017): JAN-MAR; 3-281806-91340034-7140reponame:Revista Brasileira de Economia (Online)instname:Fundação Getulio Vargas (FGV)instacron:FGVenghttps://periodicos.fgv.br/rbe/article/view/59368/67263Copyright (c) 2017 Revista Brasileira de Economiainfo:eu-repo/semantics/openAccessAstorino, EduardoChague, FernandoGiovannetti, Bruno Carada Silva, Marcos Eugênio2017-06-22T17:22:33Zoai:ojs.periodicos.fgv.br:article/59368Revistahttps://periodicos.fgv.br/rbe/https://periodicos.fgv.br/rbe/oai||rbe@fgv.br1806-91340034-7140opendoar:2024-03-06T13:03:43.844659Revista Brasileira de Economia (Online) - Fundação Getulio Vargas (FGV)true |
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 IVol-BR implied volatility variance premium risk-aversion |
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 |
author_facet |
Astorino, Eduardo Chague, Fernando Giovannetti, Bruno Cara da Silva, Marcos Eugênio |
author_role |
author |
author2 |
Chague, Fernando Giovannetti, Bruno Cara da Silva, Marcos Eugênio |
author2_role |
author author author |
dc.contributor.author.fl_str_mv |
Astorino, Eduardo Chague, Fernando Giovannetti, Bruno Cara da Silva, Marcos Eugênio |
dc.subject.por.fl_str_mv |
IVol-BR implied volatility variance premium risk-aversion |
topic |
IVol-BR implied volatility variance premium risk-aversion |
description |
We propose an implied volatility index for Brazil (called "IVol-BR"), based on daily market prices of options over IBOVESPA - an option market with relatively low liquidity and low number of option strikes. Our methodology combines usual international methodology used in high-liquidity markets with adjustments that take into account the low liquidity in Brazilian option market. 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, we show empirically that higher risk-aversion is accompanied with higher expected returns, confirming the theory that high risk-aversion should be compensated by higher returns. |
publishDate |
2017 |
dc.date.none.fl_str_mv |
2017-05-18 |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article info:eu-repo/semantics/publishedVersion Articles Artigos |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
https://periodicos.fgv.br/rbe/article/view/59368 |
url |
https://periodicos.fgv.br/rbe/article/view/59368 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
https://periodicos.fgv.br/rbe/article/view/59368/67263 |
dc.rights.driver.fl_str_mv |
Copyright (c) 2017 Revista Brasileira de Economia info:eu-repo/semantics/openAccess |
rights_invalid_str_mv |
Copyright (c) 2017 Revista Brasileira de Economia |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
EGV EPGE |
publisher.none.fl_str_mv |
EGV EPGE |
dc.source.none.fl_str_mv |
Revista Brasileira de Economia; Vol. 71 No. 1 (2017): JAN-MAR; 3-28 Revista Brasileira de Economia; v. 71 n. 1 (2017): JAN-MAR; 3-28 1806-9134 0034-7140 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_ |
1798943115243945984 |