Pub Date : 2019-01-01DOI: 10.1007/S11147-019-09155-Y
Lynn Boen, Florence Guillaume
{"title":"Towards a $$Delta $$Δ-Gamma Sato multivariate model","authors":"Lynn Boen, Florence Guillaume","doi":"10.1007/S11147-019-09155-Y","DOIUrl":"https://doi.org/10.1007/S11147-019-09155-Y","url":null,"abstract":"","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"1 1","pages":"1-39"},"PeriodicalIF":0.8,"publicationDate":"2019-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/S11147-019-09155-Y","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"52908084","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to systematic biases, especially for out-of-the-money put options. Estimates for risk-neutral variance differ across volatility surfaces by more than 10% on average, leading to variance risk premium estimates that differ by 60% on average. The variations are even larger for risk-neutral skewness. To overcome this problem, we propose a volatility surface that is built with a one-dimensional kernel regression. We assess its statistical accuracy relative to existing state-of-the-art parametric, semi- and non-parametric volatility surfaces by means of leave-one-out cross-validation, including the volatility surface of OptionMetrics. Based on 14 years of end-of-day and intraday S&P 500 and Euro Stoxx 50 option data we conclude that the proposed one-dimensional kernel regression represents option market information more accurately than existing approaches of the literature.
{"title":"Option-implied information: What’s the vol surface got to do with it?","authors":"Maxim Ulrich, Simon Walther","doi":"10.2139/ssrn.3184767","DOIUrl":"https://doi.org/10.2139/ssrn.3184767","url":null,"abstract":"We find that option-implied information such as forward-looking variance, skewness and the variance risk premium are sensitive to the way the volatility surface is constructed. For some state-of-the-art volatility surfaces, the differences are economically surprisingly large and lead to systematic biases, especially for out-of-the-money put options. Estimates for risk-neutral variance differ across volatility surfaces by more than 10% on average, leading to variance risk premium estimates that differ by 60% on average. The variations are even larger for risk-neutral skewness. To overcome this problem, we propose a volatility surface that is built with a one-dimensional kernel regression. We assess its statistical accuracy relative to existing state-of-the-art parametric, semi- and non-parametric volatility surfaces by means of leave-one-out cross-validation, including the volatility surface of OptionMetrics. Based on 14 years of end-of-day and intraday S&P 500 and Euro Stoxx 50 option data we conclude that the proposed one-dimensional kernel regression represents option market information more accurately than existing approaches of the literature.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"23 1","pages":"323-355"},"PeriodicalIF":0.8,"publicationDate":"2018-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43962733","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-02DOI: 10.1007/s11147-018-9149-7
Hongfei Tang, Xiaoqing Eleanor Xu
VIX exchange-traded products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to dissect the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during their holding period, but the actual ETP return can deviate dramatically from this naïve expected return due to four components of return deviation. The index substitution deviation is shown to be the primary driver of the bull (inverse) VIX ETPs’ return erosion (enhancement), which can be explained by the negative roll-yield as a result of the contango term structure of underlying VIX futures index. For leveraged VIX ETPs over multiple holding days, the compounding deviation due to the “constant-leverage trap” can be sizable. In addition, the NAV deviation due to expense ratio and fund management issues is negative, and the inefficiency deviation doesn’t accumulate over long holding periods due to the creation/redemption feature. Our return deviation framework can be generalized to other ETPs tracking indices that are either uninvestable or unrealistic to replicate.
{"title":"Dissecting the tracking performance of regular and leveraged VIX ETPs","authors":"Hongfei Tang, Xiaoqing Eleanor Xu","doi":"10.1007/s11147-018-9149-7","DOIUrl":"https://doi.org/10.1007/s11147-018-9149-7","url":null,"abstract":"VIX exchange-traded products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to dissect the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during their holding period, but the actual ETP return can deviate dramatically from this naïve expected return due to four components of return deviation. The <i>index substitution deviation</i> is shown to be the primary driver of the bull (inverse) VIX ETPs’ return erosion (enhancement), which can be explained by the negative roll-yield as a result of the contango term structure of underlying VIX futures index. For leveraged VIX ETPs over multiple holding days, the <i>compounding deviation</i> due to the “constant-leverage trap” can be sizable. In addition, the <i>NAV deviation</i> due to expense ratio and fund management issues is negative, and the <i>inefficiency deviation</i> doesn’t accumulate over long holding periods due to the creation/redemption feature. Our return deviation framework can be generalized to other ETPs tracking indices that are either uninvestable or unrealistic to replicate.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"41 4-5","pages":""},"PeriodicalIF":0.8,"publicationDate":"2018-11-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138513637","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-10-16DOI: 10.1007/s11147-018-9150-1
Ming-Chieh Wang, Li-Jhang Huang
{"title":"Pricing cross-currency interest rate swaps under the Levy market model","authors":"Ming-Chieh Wang, Li-Jhang Huang","doi":"10.1007/s11147-018-9150-1","DOIUrl":"https://doi.org/10.1007/s11147-018-9150-1","url":null,"abstract":"","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"22 1","pages":"329 - 355"},"PeriodicalIF":0.8,"publicationDate":"2018-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s11147-018-9150-1","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"52908040","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-09-27DOI: 10.1007/s11147-018-9148-8
B. Hippert, André Uhde, Sascha Tobias Wengerek
{"title":"Portfolio benefits of adding corporate credit default swap indices: evidence from North America and Europe","authors":"B. Hippert, André Uhde, Sascha Tobias Wengerek","doi":"10.1007/s11147-018-9148-8","DOIUrl":"https://doi.org/10.1007/s11147-018-9148-8","url":null,"abstract":"","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"22 1","pages":"203 - 259"},"PeriodicalIF":0.8,"publicationDate":"2018-09-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s11147-018-9148-8","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"52907979","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-06-22DOI: 10.1007/s11147-018-9146-x
Hendrik Kohrs, Hermann Mühlichen, B. Auer, Frank Schuhmacher
{"title":"Pricing and risk of swing contracts in natural gas markets","authors":"Hendrik Kohrs, Hermann Mühlichen, B. Auer, Frank Schuhmacher","doi":"10.1007/s11147-018-9146-x","DOIUrl":"https://doi.org/10.1007/s11147-018-9146-x","url":null,"abstract":"","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"22 1","pages":"77 - 167"},"PeriodicalIF":0.8,"publicationDate":"2018-06-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s11147-018-9146-x","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"52907895","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-06-16DOI: 10.1007/s11147-018-9145-y
Wei Lin, Shenghong Li, Shane Chern, Jin E. Zhang
This paper aims to develop a new free stochastic volatility model, joint with jumps. By freeing the power parameter of instantaneous variance, this paper takes Heston model and 3/2 model for special examples, and extends the generalizability. This model is named after free stochastic volatility model, and it owns two distinctive features. First of all, the power parameter is not constrained, so as to enable the data to voice its authentic direction. The Generalized Methods of Moments suggest that the purpose of this newly-added parameter is to create various volatility fluctuations observed in financial market. Secondly, even upward and downward jumps are separately modeled to accommodate the market data, this paper still provides the quasi-closed-form solutions for futures and option prices. Consequently, the model is novel and highly tractable. Here, it should be noted that the data on VIX futures and corresponding option contracts is employed to evaluate the model, in terms of its pricing and implied volatility features capturing performance. To sum up, the free stochastic volatility model with asymmetric jumps is capable of adequately capturing the implied volatility dynamics. Thus, it can be regarded as a model advantageous in pricing VIX derivatives with fixed power volatility models.
{"title":"Pricing VIX derivatives with free stochastic volatility model","authors":"Wei Lin, Shenghong Li, Shane Chern, Jin E. Zhang","doi":"10.1007/s11147-018-9145-y","DOIUrl":"https://doi.org/10.1007/s11147-018-9145-y","url":null,"abstract":"This paper aims to develop a new free stochastic volatility model, joint with jumps. By freeing the power parameter of instantaneous variance, this paper takes Heston model and 3/2 model for special examples, and extends the generalizability. This model is named after free stochastic volatility model, and it owns two distinctive features. First of all, the power parameter is not constrained, so as to enable the data to voice its authentic direction. The Generalized Methods of Moments suggest that the purpose of this newly-added parameter is to create various volatility fluctuations observed in financial market. Secondly, even upward and downward jumps are separately modeled to accommodate the market data, this paper still provides the quasi-closed-form solutions for futures and option prices. Consequently, the model is novel and highly tractable. Here, it should be noted that the data on VIX futures and corresponding option contracts is employed to evaluate the model, in terms of its pricing and implied volatility features capturing performance. To sum up, the free stochastic volatility model with asymmetric jumps is capable of adequately capturing the implied volatility dynamics. Thus, it can be regarded as a model advantageous in pricing VIX derivatives with fixed power volatility models.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"225 1","pages":""},"PeriodicalIF":0.8,"publicationDate":"2018-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138524743","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-06-13DOI: 10.1007/s11147-018-9147-9
Ging-Ginq Pan, Yung-Ming Shiu, Tu-Cheng Wu
The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our results generally reveal that the index option returns are significantly negative, we also find that whilst the return rates of monthly-expiring calls are inferior to those of weekly-expiring calls, the return rates of monthly puts tend to be less negative than those of weekly puts. Furthermore, as monthly (weekly) options approach their maturity dates, the underlying index returns are found to be negative (positive). Risk-neutral volatility and skewness are used to measure the respective fear and pessimism levels among investors towards the stock market, and indeed, we find that as the expiration date approaches, there is a discernible increase in both the fear and pessimism of investors with regard to monthly options, as compared to a reduction for weekly options.
{"title":"Is trading in the shortest-term index options profitable?","authors":"Ging-Ginq Pan, Yung-Ming Shiu, Tu-Cheng Wu","doi":"10.1007/s11147-018-9147-9","DOIUrl":"https://doi.org/10.1007/s11147-018-9147-9","url":null,"abstract":"The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our results generally reveal that the index option returns are significantly negative, we also find that whilst the return rates of monthly-expiring calls are inferior to those of weekly-expiring calls, the return rates of monthly puts tend to be less negative than those of weekly puts. Furthermore, as monthly (weekly) options approach their maturity dates, the underlying index returns are found to be negative (positive). Risk-neutral volatility and skewness are used to measure the respective fear and pessimism levels among investors towards the stock market, and indeed, we find that as the expiration date approaches, there is a discernible increase in both the fear and pessimism of investors with regard to monthly options, as compared to a reduction for weekly options.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"2 11","pages":""},"PeriodicalIF":0.8,"publicationDate":"2018-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138524764","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-05-19DOI: 10.1007/s11147-018-9144-z
C. Necula, Gabriel G. Drimus, W. Farkas
{"title":"A general closed form option pricing formula","authors":"C. Necula, Gabriel G. Drimus, W. Farkas","doi":"10.1007/s11147-018-9144-z","DOIUrl":"https://doi.org/10.1007/s11147-018-9144-z","url":null,"abstract":"","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"22 1","pages":"1 - 40"},"PeriodicalIF":0.8,"publicationDate":"2018-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s11147-018-9144-z","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47502790","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-04-18DOI: 10.1007/s11147-018-9143-0
Robert Jarrow, Scott Fung, Shih-Chuan Tsai
Using account-level transaction data in options and futures markets, we investigate the existence of market manipulation, which is the ability of large traders to trade strategically, impacting prices and making abnormal profits. First, large trader’s option positions have a quantity impact on the underlying asset’s price. Second, large traders generate significantly positive alphas from trading options and futures. Among the different investor types, proprietary dealers generate the largest positive alphas. Third, these abnormal returns are consistent with strategic trading and cross-market manipulation. The evidence supports market manipulation across the options and futures markets, but not within the futures market itself.
{"title":"An empirical investigation of large trader market manipulation in derivatives markets","authors":"Robert Jarrow, Scott Fung, Shih-Chuan Tsai","doi":"10.1007/s11147-018-9143-0","DOIUrl":"https://doi.org/10.1007/s11147-018-9143-0","url":null,"abstract":"Using account-level transaction data in options and futures markets, we investigate the existence of market manipulation, which is the ability of large traders to trade strategically, impacting prices and making abnormal profits. First, large trader’s option positions have a quantity impact on the underlying asset’s price. Second, large traders generate significantly positive alphas from trading options and futures. Among the different investor types, proprietary dealers generate the largest positive alphas. Third, these abnormal returns are consistent with strategic trading and cross-market manipulation. The evidence supports market manipulation across the options and futures markets, but not within the futures market itself.","PeriodicalId":45022,"journal":{"name":"Review of Derivatives Research","volume":"5 ","pages":""},"PeriodicalIF":0.8,"publicationDate":"2018-04-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138524742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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