Volatility Arbitrage as a Hedge Fund Strategy
Author | : Michael Huber |
Publisher | : |
Total Pages | : |
Release | : 2007 |
ISBN-10 | : OCLC:611874147 |
ISBN-13 | : |
Rating | : 4/5 (47 Downloads) |
Download or read book Volatility Arbitrage as a Hedge Fund Strategy written by Michael Huber and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I empirically investigate whether variance risk is priced in options on the Swiss Market Index (SMI) and individual stock options on SMI constituent stocks. Based on a model-free implied variance estimator derived by Britten-Jones and Neuberger (2000), I obtain variance risk premium estimates for the SMI and all individual stocks included in the index. I find evidence for a negative variance risk premium priced in SMI options. I do not find that variance risk is priced in individual stock options. I then decompose total index variance into individual variance risk and correlation risk. Based on this decomposition, I find evidence for a large and negative correlation risk premium. I do not find that variance risk other than correlation risk is priced in option prices. Priced correlation therefore potentially offers a risk-based explanation for the differential pricing of index options versus individual stock options.