The information content of short-term options

Oikonomou, Ioannis; Stancu, Andrei Tudor; Symeonidis, Lazaros; Simen, Chardin Wese

doi:10.1016/j.finmar.2019.07.003

Cited by 9 publications

(5 citation statements)

References 45 publications

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“…Following the early studies of Latane and Rendleman (1976) and Chiras and Manaster (1978) on the superior predictive power of option-implied standard deviations for future volatility forecasting, Day and Lewis (1992) and Lamoureux and Lastrapes (1993) questioned their overperformance compared to historical time series models, elucidating that implied volatilities are biased and inefficient predictors with poor contribution in volatility forecasting accuracy partly due to misspecification errors. In marked contrast, the vast majority of the subsequent studies (see, for example, Blair et al, 2001;Busch et al, 2011;Christensen & Prabhala, 1998;Frijns et al, 2010;Kambouroudis et al, 2016;Martens & Zein, 2004;Oikonomou et al, 2019) alongside the improvement in implied volatility extraction techniques from option prices (Carr & Wu, 2006;Fleming, 1998;Jiang & Tian, 2005) confirm that the variability implicit in options, interpreted as an ex-ante volatility market forecast, is a substantially better predictor with incremental information value for future volatility beyond that captured by squared returns or realized variance.…”

Section: The Aim-heavy Specificationmentioning

confidence: 99%

Financial volatility modeling with option-implied information and important macro-factors

Yfanti

Karanasos

2021

Journal of the Operational Research Society

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The research debate on the informational content embedded in option prices mostly approves the incremental predictive power of implied volatility estimates for financial volatility forecasting beyond that contained in GARCH and realized variance models. Contributing to this ongoing debate, we introduce the novel AIM-HEAVY model, a tetravariate system with asymmetries, option-implied volatility, and economic uncertainty variables beyond daily and intra-daily dispersion measures included in the benchmark HEAVY specification. We associate financial with macroeconomic uncertainties to explore the macro-financial linkages in the high-frequency domain. In this vein, we further focus on economic factors that exacerbate stock market volatility and represent major threats to financial stability. Hence, our findings are directly connected to the current world-wide Coronavirus outbreak. Financial volatilities are already close to their crisis-peaks amid the generalized fear about controversial economic policies to support societies and the financial system, especially in the case of the heavily criticized UK authorities' delayed and limited response.

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Section: The Aim-heavy Specificationmentioning

confidence: 99%

Financial volatility modeling with option-implied information and important macro-factors

Yfanti

Karanasos

2021

Journal of the Operational Research Society

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“…In an extension to this research stream, one might be interested in examining the impact of shorter‐dated options such as weeklies, which are becoming popular across the exchanges, on the spot volatility. Oikonomou et al (2019) exploited the information content of weeklies and find that the implied variance of these options is a better predictor of the future weekly realized variance than not only monthly implied variance but also well‐established time‐series models of realized variance. Andersen et al (2017) use the deep OTM weekly options as an indicator of a risk‐neutral jump process and ATM options as a reflection of current spot volatility.…”

Section: Development Of Hypothesismentioning

confidence: 99%

Does options improve the information absorption? Evidence from the introduction of weekly index options

Prachi

Kotha

2022

Int Rev Finance

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This paper empirically examines the effect of weekly options introduction on the benchmark index of Indian stock market, NIFTY50. The paper evaluates the possible stabilizing or destabilizing nature of impact on underlying volatility focusing on the relation between information and volatility using GARCH framework. The results indicate that the onset of weekly index options has improved the information assimilation and reduced the persistence of old information on volatility. Further, similar changes are not evident on a control index, NIFTY NEXT50. Overall, the results indicate an increase in market efficiency with weekly index options trading.

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“…These prior studies were unable to study weekly options because their sample periods all ended prior to a significant number of firms having weekly options. Prior research on weekly options largely focuses on indices rather than individual stocks (e.g., Andersen et al 2017;Oikonomou et al 2019;Jain and Kotha 2022). The few studies that examine weekly options on individual stocks do not examine earnings announcements or straddle returns (e.g., Wen 2020;Bryzgalova et al 2022).…”

Section: Introductionmentioning

confidence: 99%

The Efficiency of Weekly Option Prices around Earnings Announcements

Milian

2023

JRFM

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This study examines the efficiency of weekly option prices around firms’ earnings announcements. With most of the largest firms now having options that expire on a weekly basis, option traders can hedge or speculate on earnings news using options that expire very close to a firm’s earnings announcement date. For earnings announcements near an options expiration date, one can estimate a firm’s expected stock price move in response to its earnings news (i.e., its option implied earnings announcement move) as the price of its at-the-money straddle as a proportion of its stock price. This study tests whether differences between historical earnings announcement moves and option implied earnings announcement moves predict straddle returns. Through the analysis of portfolio returns and Fama–MacBeth regressions, this study finds that straddle returns are significantly higher (lower) when the historical earnings announcement move is high (low) relative to the option implied earnings announcement move. In contrast to prior research, this study does not find an association between straddle returns and historical volatility, historical earnings announcement volatility, implied volatility, or the difference between historical volatility and implied volatility. Overall, this study suggests that weekly straddle prices around earnings announcements are not optimally efficient.

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The information content of short-term options

Cited by 9 publications

References 45 publications

Financial volatility modeling with option-implied information and important macro-factors

Financial volatility modeling with option-implied information and important macro-factors

Does options improve the information absorption? Evidence from the introduction of weekly index options

The Efficiency of Weekly Option Prices around Earnings Announcements

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