Asymmetric Volatility and Trading Activity in Index Futures Options

Chan, Kam C.; Cheng, Louis T. W.; Lung, Peter P.

doi:10.1111/j.1540-6288.2005.00107.x

Cited by 4 publications

(9 citation statements)

References 21 publications

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“…The results suggest that this buying pressure, which is typically decreasing with moneyness, drives the downward sloping shape of the implied volatility function. In a related paper, Chan et al (2005) argue that net buying pressure and liquidity affect the response of implied volatility to returns. The response seems to be distorted by net buying pressure for low moneyness options and thin trading of medium moneyness options.…”

Section: Causality Analysismentioning

confidence: 99%

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

Masset

Wallmeier

2010

Euro Fin Management

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One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead-lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse-response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5-minute intervals, we find that the relationship is return-driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.

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Section: Causality Analysismentioning

confidence: 99%

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

Masset

Wallmeier

2010

Euro Fin Management

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“…Using trading simulation on the S&P index options, Bollen and Whaley (2004) report positive and significant abnormal returns by selling delta‐hedged S&P 500 index out‐of‐the‐money put options. Following Bollen and Whaley's net buying pressure hypothesis, Chan et al . (2004, 2005, 2006) document similar net buying pressure findings based on the Hong Kong Hang Seng Index options and the S&P 500 futures options.…”

Section: Introductionmentioning

confidence: 99%

“…First, we use the S&P 500 futures options data compiled by the Chicago Mercantile Exchange. With the exception of Chan et al . (2005) and Brown and Pinder (2005), most implied volatility studies are confined to spot options.…”

Section: Introductionmentioning

confidence: 99%

“…First, we use the S&P 500 futures options data compiled by the Chicago Mercantile Exchange. With the exception of Chan et al (2005) and Brown and Pinder (2005), most implied volatility studies are confined to spot options. Given that futures options are an alternative and popular tool for investors to hedge their underlying positions, our study based on futures options sheds light if the net buying pressure hypothesis provides a robust explanation for the implied volatility shapes in different options markets.…”

Section: Introductionmentioning

confidence: 99%

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Business Cycles and Net Buying Pressure in the S&P 500 Futures Options

Chan¹,

Chen²,

Lung³

2010

Euro Fin Management

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We analyse the cyclical behaviour and intraday pattern of net buying pressure in the S&P 500 futures options market. The results suggest that the net buying pressure of puts is counter-cyclical and is more intense during contraction periods. The trading profits for selling put options during contraction periods thus far exceed those during expansion periods. Net buying pressure also exhibits an intraday pattern. Trading profits in the early trading sessions are higher than those for the rest of the day. In addition, we show that hourly-basis hedging yields smaller profits than daily-basis hedging, which suggests that the trading profits based on daily-basis hedging may contain a risk premium associated with discretely rebalanced 'risk-free' option portfolios.

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“…1 1 For instance, see Chan, Cheng, and Lung (2005) where implied volatility is related to equity returns. …”

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confidence: 99%

Faster Implied Volatilities via the Implicit Function Theorem

Kelly

2006

The Financial Review

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We present a faster, more accurate technique for estimating implied volatility using the standard partial derivatives of the Black-Scholes option-pricing formula. Beside Newton-Raphson and slower approximation methods, this technique is the first to provide an error tolerance, which is essential for practical application. All existing noniterative approximation methods do not provide error tolerances and have the potential for large errors. Copyright 2006, The Eastern Finance Association.

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Asymmetric Volatility and Trading Activity in Index Futures Options

Cited by 4 publications

References 21 publications

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

Business Cycles and Net Buying Pressure in the S&P 500 Futures Options

Faster Implied Volatilities via the Implicit Function Theorem

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