Abstract

http://ssrn.com/abstract=2213900
 
 

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Corridor Volatility Risk and Expected Returns


George Dotsis


Essex Finance Centre, Essex Business School,University of Essex -; University of Athens - Faculty of Economics

Nikolaos Vlastakis


Essex Business School, University of Essex

February 8, 2013


Abstract:     
In this paper we examine the pricing of volatility risk using SPX corridor implied volatility. We decompose model-free total implied volatility into various components using different segments of the cross section of out-of-the money put and call option prices. We find that only model-free volatility computed from the cross section of out-of-the-money call option prices carries a significant negative risk premium in the cross section of stock returns and also contains all relevant information for forecasting future volatility risk. Overall, our empirical results provide strong evidence that SPX out-of-the money put option prices do not contain useful information for capturing systematic volatility risk in equity returns.

Number of Pages in PDF File: 27

Keywords: corridor implied volatility, tail risk, cross-section of stock returns

JEL Classification: G10, G12

working papers series


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Date posted: February 9, 2013  

Suggested Citation

Dotsis, George and Vlastakis, Nikolaos, Corridor Volatility Risk and Expected Returns (February 8, 2013). Available at SSRN: http://ssrn.com/abstract=2213900 or http://dx.doi.org/10.2139/ssrn.2213900

Contact Information

George Dotsis (Contact Author)
Essex Finance Centre, Essex Business School,University of Essex - ( email )
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
University of Athens - Faculty of Economics ( email )
8 Pesmazoglou street
GR-10559 Athens
Greece
HOME PAGE: http://sites.google.com/site/gdotsis/
Nikolaos Vlastakis
Essex Business School, University of Essex ( email )
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
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