Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution

78 Pages Posted: 9 Dec 2016 Last revised: 5 Jun 2019

See all articles by Christian Schlag

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Julian Thimme

Karlsruhe Institute of Technology

Rüdiger Weber

University of Michigan, Stephen M. Ross School of Business

Date Written: May 23, 2019

Abstract

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that `late' stocks can only have higher expected returns than `early' stocks if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.

Keywords: Preference for early resolution of uncertainty, implied volatility, cross-section of expected stock returns, asset pricing

JEL Classification: G12, E44, D81

Suggested Citation

Schlag, Christian and Thimme, Julian and Weber, Rüdiger, Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution (May 23, 2019). Available at SSRN: https://ssrn.com/abstract=2881993 or http://dx.doi.org/10.2139/ssrn.2881993

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Julian Thimme (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://julianthimme.de

Rüdiger Weber

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

HOME PAGE: http://www.rudigerweber.com

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