Rotterdam Brown Bag Seminars in Finance

Speaker(s)
Xiao Xiao (Erasmus University Rotterdam)
Date
Thursday, 30 November 2017
Location
Rotterdam

This paper studies how the uncertainty of volatility change predicts the cross-section of delta-hedged equity option returns. We use three estimators of time-varying daily volatility: option implied volatility, volatility of daily returns under EGARCH model, and realized volatility of intra-day returns. We find that delta-hedged option returns consistently decrease with the volatility of volatility change. The results are robust to firm characteristics, to stock and option liquidity, to volatility characteristics, to jump risks, and are not explained by standard risk factors. It suggests that option dealers charge a higher premium for options on high volatility uncertainty stocks which are more difficult to hedge. Joint with Jie Cao, Aurelio Vasquez and Xintong Zhan.