Journal ArticleDOI
Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options
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In this article, the authors provide new insights into the economic sources of skewness and derive laws that decompose individual risk-neutral distributions into a systematic component and an idiosyncratic component.Abstract:
This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index, and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This paper explains the presence and evolution of risk-neutral skewness over time and in the cross-section of individual stocks.read more
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Journal ArticleDOI
Jumps in Financial Markets: A New Nonparametric Test and Jump Dynamics
Suzanne S. Lee,Per A. Mykland +1 more
TL;DR: In this paper, the authors introduce a nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra-day level, and demonstrate that the likelihood of misclassification of jumps becomes negligible when using high-frequency returns.
Journal ArticleDOI
Does Net Buying Pressure Affect the Shape of Implied Volatility Functions
TL;DR: This paper examined the relation between net buying pressure and the shape of the implied volatility function (IVF) of S&P 500 index options and options on twenty individual stocks, and found that time variation in the volatility of an option series is directly related to net buying pressures from public order flow, while call options tend to dominate in stock option markets.
Journal ArticleDOI
Delta-Hedged Gains and the Negative Market Volatility Risk Premium
Nikunj Kapadia,Gurdip Bakshi +1 more
TL;DR: In this paper, the authors investigate whether the volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock) within a stochastic volatility framework.
Journal ArticleDOI
Ex Ante Skewness and Expected Stock Returns
TL;DR: This paper used a sample of option prices and the method of Bakshi, Kapadia and Madan (2003) to estimate the ex ante higher moments of the underlying individual securities' risk-neutral returns distribution.
Posted Content
Demand-Based Option Pricing
TL;DR: In this article, the authors model the demand-pressure effect on prices when options cannot be perfectly hedged and show that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option.
References
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Journal ArticleDOI
Risk, Return, and Equilibrium: Empirical Tests
Eugene F. Fama,James D. MacBeth +1 more
TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Journal ArticleDOI
Large sample properties of generalized method of moments estimators
Book ChapterDOI
Time Series Analysis
TL;DR: This paper provides a concise overview of time series analysis in the time and frequency domains with lots of references for further reading.
Book
Continuous martingales and Brownian motion
Daniel Revuz,Marc Yor +1 more
TL;DR: In this article, the authors present a comprehensive survey of the literature on limit theorems in distribution in function spaces, including Girsanov's Theorem, Bessel Processes, and Ray-Knight Theorem.
Journal ArticleDOI
Option pricing when underlying stock returns are discontinuous
TL;DR: In this article, an option pricing formula was derived for the more general case when the underlying stock returns are generated by a mixture of both continuous and jump processes, and the derived formula has most of the attractive features of the original Black-Scholes formula.