Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution
78 Pages Posted: 9 Dec 2016 Last revised: 3 Feb 2020
Date Written: January 27, 2020
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: Suggested Citation