International Volatility Arbitrage

79 Pages Posted: 12 Jul 2018 Last revised: 21 Oct 2018

Date Written: June 27, 2018

Abstract

Are options on exchange-traded products (ETPs) and indexes consistently priced internationally? The cross-section of international option returns exhibits a mispricing by sorting on ex-ante volatility returns. In addition, selling international ETP options and buying their corresponding index options commands a positive risk premium. Both empirical findings are economically large and pervasive internationally, whereas they are comparably small domestically. While volatility hedge funds are exposed towards domestic option products, they neglect the possibility of engaging in foreign volatility arbitrage. These findings entail that alpha seekers may expand their horizon towards international derivatives which at first glance are similar, but institutionally are not.

Keywords: systematic volatility arbitrage, cross-section of option returns, dispersion trading

JEL Classification: G11, G12, G13, G14

Suggested Citation

Tosi, Adriano, International Volatility Arbitrage (June 27, 2018). Available at SSRN: https://ssrn.com/abstract=3203445 or http://dx.doi.org/10.2139/ssrn.3203445

Adriano Tosi (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

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