This paper studies option investors' tendency to deviate from risk-neutrality around extreme financial events. We incorporate ambiguity into Black-Scholes theory and analyze the lead-lag association between option and stock markets during 2006-2008. Our findings from the Standard and Poor's 500 index options reveal that investors' option implied ambiguity moderates the lead-lag relationship between implied and realized volatility. We find that implied ambiguity contains predictive realized volatility information (beyond constant and stochastic implied volatilities), and that implied volatility is a less biased predictor of realized market variance when accounting for ambiguity in option pricing. We are also able to track changing investors' ambiguity perceptions (pessimism or optimism) prior to severe volatility events and document shifts in ambiguity aversion among put option holders in the period leading to the fall 2008 global market crash. Our results hold under multiple-priors and Choquet ambiguity specifications.
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This paper studies the role of ambiguity and managerial ability in firm growth options from the perspective of behavioural theory. We argue that managerial ability increases both the identification and exploitation of growth options opportunities, but ambiguity reduces strategic growth options value as a result of information incompleteness and non鈥怋ayesian behaviour. Using a dataset of all US鈥恖isted firms, we test the joint effects of ambiguity and managerial ability on growth options value after controlling for standard determinants and endogeneity. The results indicate that ambiguity has a negative effect on growth options value, while ability has a positive effect. We also find that the negative association between ambiguity and growth options is less pronounced with higher managerial ability. These findings underscore the importance of firm heterogeneity in the identification, exercise, and management of strategic and innovative real options opportunities. The paper's contribution provides relevant management insights into the behavioural antecedents of real options at the firm level as well as highlights that managerial and behavioural characteristics are important determinants of growth options value.
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