A New Index of Option Implied Absolute Deviation

29 Pages Posted: 21 Jan 2021

See all articles by George Dotsis

George Dotsis

National and Kapodistrian University of Athens - Faculty of Economics; Essex Finance Centre, Essex Business School, University of Essex

Date Written: November 11, 2020

Abstract

This paper proposes of new index of forward looking absolute deviation extracted from option prices. The new index, named ADIX, is model-free and easy to compute using at-the-money straddle prices. An empirical analysis using S&P 500 options data for the time period 1996-2019 reveals that ADIX has similar behavior to VIX in terms of time series dynamics, risk premiums and forecasting ability. The new index offers an alternative risk measure, more intuitive as a measure of dispersion, to study information embedded in option prices.

Keywords: straddle, option implied absolute deviation

JEL Classification: G12, G13

Suggested Citation

Dotsis, George, A New Index of Option Implied Absolute Deviation (November 11, 2020). Available at SSRN: https://ssrn.com/abstract=3728746 or http://dx.doi.org/10.2139/ssrn.3728746

George Dotsis (Contact Author)

National and Kapodistrian University of Athens - Faculty of Economics ( email )

Greece

HOME PAGE: http://sites.google.com/site/gdotsis/

Essex Finance Centre, Essex Business School, University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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