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

78 Pages Posted: 9 Dec 2016 Last revised: 3 Feb 2020

See all articles by Christian Schlag

Christian Schlag

Goethe University Frankfurt; Leibniz Institute for Financial Research SAFE

Julian Thimme

Karlsruhe Institute of Technology

Rüdiger Weber

WU Vienna; Vienna Graduate School of Finance (VGSF)

Date Written: January 27, 2020

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 (January 27, 2020). SAFE Working Paper No. 265, Available at SSRN: https://ssrn.com/abstract=2881993 or http://dx.doi.org/10.2139/ssrn.2881993

Christian Schlag

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Julian Thimme (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://www.julianthimme.de

Rüdiger Weber

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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