What Drives Index Options Exposure?

37 Pages Posted: 31 Dec 2013 Last revised: 30 Mar 2014

See all articles by Timothy C. Johnson

Timothy C. Johnson

University of Illinois at Urbana-Champaign

Mo Liang

Renmin University of China - School of Finance

Yun Liu

University of Illinois at Urbana-Champaign - Department of Mathematics

Date Written: March 29, 2014

Abstract

This paper documents the history of aggregate positions in U.S. index options and investigates the driving factors behind use of this class of derivatives. The goal is to identify basic properties of the level, trend, and covariates of options quantities in order to provide benchmark facts for equilibrium theories of derivatives usage. The outstanding quantity of options in terms of market value or volatility exposure is small, which may pose a challenge to models that invoke population heterogeneity to explain trading volume. The nonstationary component of aggregate options exposure is well described as driven by the stochastic trend in equity market activity, consistent with the latter being a general proxy for technology and heterogeneity. The notional quantity of outstanding options exhibits statistically strong risk effects. However, the sign of the response is different for different dimensions of risk. This suggests that theoretical models will need to include heterogeneity in investor risk perception.

Keywords: stock index options; quantities; volatility exposure

JEL Classification: G12, N22

Suggested Citation

Johnson, Timothy C. and Liang, Mo and Liu, Yun, What Drives Index Options Exposure? (March 29, 2014). Available at SSRN: https://ssrn.com/abstract=2373560 or http://dx.doi.org/10.2139/ssrn.2373560

Timothy C. Johnson (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Mo Liang

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Yun Liu

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

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