Abstract

http://ssrn.com/abstract=438661
 
 

Citations



 


 



Volatility Risk Premiums Embedded in Individual Equity Options: Some New Insights


Nikunj Kapadia


University of Massachusetts Amherst - Department of Finance & Operations Management

Gurdip Bakshi


University of Maryland - Robert H. Smith School of Business


Journal of Derivatives, Fall 2003, pp. 45-54

Abstract:     
The research indicates that index option prices incorporate a negative volatility risk premium, thus providing a possible explanation of why Black-Scholes implied volatilities of index options on average exceed realized volatilities. This examination of the empirical implication of a market volatility risk premium on 25 individual equity options provides some new insights.

While the Black-Scholes implied volatilities from individual equity options are also greater on average than historical return volatilities, the difference between them is much smaller than for the market index. Like index options, individual equity option prices embed a negative market volatility risk premium, although much smaller than for the index option - and idiosyncratic volatility does not appear to be priced.

These empirical results provide a potential explanation of why buyers of individual equity options leave less money on the table than buyers of index options.

JEL Classification: G120, G130

Accepted Paper Series





Not Available For Download

Date posted: September 9, 2003  

Suggested Citation

Kapadia, Nikunj and Bakshi, Gurdip, Volatility Risk Premiums Embedded in Individual Equity Options: Some New Insights. Journal of Derivatives, Fall 2003, pp. 45-54. Available at SSRN: http://ssrn.com/abstract=438661

Contact Information

Nikunj Kapadia
University of Massachusetts Amherst - Department of Finance & Operations Management ( email )
Amherst, MA 01003
United States
413-545-5643 (Phone)
413-545-5600 (Fax)
HOME PAGE: http://www-unix.oit.umass.edu/~nkapadia/
Gurdip S. Bakshi (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-2261 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/gbakshi
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