Volatility Mispricing in US Equity Option Markets

Recent research shows that volatility measurement errors are a prime source of mispricing in options markets. This allows investors to engage in trading strategies that earn abnormal rates of return. We conduct empirical research on US non-dividend paying American call options and perform a cross-sectional study of these stock option returns. We find that a zero-cost trading strategy that is long (short) in 2-month-to-expiry calls with relatively large positive (negative) difference between historical realized volatility and option implied volatility produces significant positive returns, but the same strategy applied to 1-month-to-expiry calls and delta-hedged calls does not

Multifactor consumption based asset pricing models using the US stock market as a reference: Evidence from a panel of developed economies

In this paper we extend the time series analysis to the panel framework to test the C-CAPM driven by wealth references for developed countries. Specifically, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error components. The empirical ndings of this two-factor model with various specifications all indicate that there is significant unobserved heterogeneity captured by cross-country fixed e¤ects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects

Multifactor consumption based asset pricing models using the US stock market as a reference: Evidence from a panel of developed economies

This article was submitted and presented at the European Economics and Finance Society Conference, 2012, at Koç University, Istanbul, and the final version was published in a Special Section of Economic Modelling. The special section editor was John Hunter from Brunel University London.In this paper we extend the time series analysis to the panel framework to test the C-CAPM driven by wealth references for developed countries. Speci cally, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error com- ponents. The empirical findings of this two-factor model with various specifications all indicate that there is significant unobserved heterogeneity captured by cross-country fixed e¤ects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects

STOCK MARKET VOLATILITY AND THE FORECASTING ACCURACY OF IMPLIED VOLATILITY INDICES

This study develops a new model-free benchmark of implied volatility for the Japanese stock market similar in construction to the new VIX based on the S&P 500 index. It also examines the stochastic dynamics of the implied volatility index and its relationship with realized volatility in both markets. There is evidence that implied volatility is governed by a long-memory process. Despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. The implied volatility index is also found to be inclusive of some but not all information on future volatility contained in historical returns. However, its higher out-of sample performance provides further support to the rationale behind drawing inference about future stock market volatility based on the incremental information contained in options prices.Licensing; Implied volatility index, Out-of-sample forecasting, GARCH modelling

A six-factor asset pricing model

The present study introduce the human capital component to the Fama and French five-factor model proposing an equilibrium six-factor asset pricing model. The study employs an aggregate of four sets of portfolios mimicking size and industry with varying dimensions. The first set consists of three set of six portfolios each sorted on size to B/M, size to investment, and size to momentum. The second set comprises of five index portfolios, third, a four-set of twenty-five portfolios each sorted on size to B/M, size to investment, size to profitability, and size to momentum, and the final set constitute thirty industry portfolios. To estimate the parameters of six-factor asset pricing model for the four sets of variant portfolios, we use OLS and Generalized method of moments based robust instrumental variables technique (IVGMM). The results obtained from the relevance, endogeneity, overidentifying restrictions, and the Hausman's specification, tests indicate that the parameter estimates of the six-factor model using IVGMM are robust and performs better than the OLS approach. The human capital component shares equally the predictive power alongside the factors in the framework in explaining the variations in return on portfolios. Furthermore, we assess the t-ratio of the human capital component of each IVGMM estimates of the six-factor asset pricing model for the four sets of variant portfolios. The t-ratio of the human capital of the eighty-three IVGMM estimates are more than 3.00 with reference to the standard proposed by Harvey et al. (2016). This indicates the empirical success of the six-factor asset-pricing model in explaining the variation in asset returns

A multifactor consumption based asset pricing model of the UK stock market: The US stock market as a wealth reference

Here a multifactor model of UK stock returns is developed, replacing the conventional consumption habit reference by a relation that depends on US wealth. Two step Instrumental Variables and Generalized Method of Moments estimators are applied to reduce the impact of weak instruments. The standard errors are corrected for the generated regressor problem and the model is found to explain UK excess returns by UK consumption growth and expected US excess returns. Hence, controlling for nomina l effects by subtracting a risk free rate and conditioning on real US excess returns provides a coherent explanation of the equity premium puzzle

Stock markets, banks and growth: Panel evidence.

[Dataset available: http://hdl.handle.net/10411/12893]

Stock Markets, Banks, and Growth: Panel Evidence

This paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976-98 and applying recent GMM techniques developed for dynamic panels. On balance, we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity, omitted variables or unobserved country-specific effects.

Multifactor consumption based asset pricing model of the UK stock market: The US stock market as a wealth reference

Copyright @ 2011 University of BirminghamHere a multifactor model of UK stock returns is developed, replac- ingHere a multifactor model of UK stock returns is developed, replacing the conventional consumption habit reference by a relation that depends on US wealth. Two step Instrumental Variables and Generalized Method of Moments estimators are applied to reduce the impact of weak instruments. The standard errors are corrected for the generated regressor problem and the model is found to explain UK excess returns by UK consumption growth and expected US excess returns. Hence, controlling for nominal effects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle. US excess returns. Hence, controlling for nominal e¤ects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle