A Survey of Three Derivative-Based Methods to Harvest the Volatility Premium in Equity Markets

Ge, Wei

doi:10.3905/joi.2016.25.3.048

Cited by 5 publications

(1 citation statement)

References 16 publications

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“…These strategies are typically built on VIX futures (Simon and Campasano 2014) or VIX options (Simon 2017) and aim to roll down the term-structure of option-implied volatility. As the term-structure of implied volatility is typically in contango, investors can enter into a short-position in longer-term futures to roll down the term-structure of VIX futures and, on average, earn the corresponding premium (Ge 2016b). However, in our understanding, this premium is not as much a variance risk premium as it is a VIX term-structure premium.…”

Section: Literature Overviewmentioning

confidence: 99%

Moment Risk Premiums in Option Markets: On Measurement, Structure, and Investment Implications

Dörries¹

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This paper studies quantile-based moment premiums. The quantile-based approach delivers robust and flexible alternatives to premiums for variance, skewness and kurtosis risk and enhances our understanding of the pricing of risks in derivatives markets. To quantify these premiums, the paper introduces a new class of synthetic derivatives contracts: quantile swaps. Such contracts mimic quantile-based moment measures from robust statistics. An empirical study of index options detects two distinct premiums for dispersion and asymmetry, but no premium for steepness.The premium for dispersion can be explained by traditional moment risk premiums, whereas the asymmetry premium is a novel premium that our approach is able to detect. Moreover, we disaggregate the overall premiums into upside and downside premiums. The downside dispersion premium is not restricted to the lower tail but is also observed in the center of the distribution. However, at the center, this downside premium is partly offset by an upside discount, explaining why the overall premium is mainly a tail effect. Overall, as some of our findings differ markedly from results obtained with traditional moment swaps, they are a warning to interpret moment premiums cautiously.

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Section: Literature Overviewmentioning

confidence: 99%