We document a robust new ¯nding on the cross-section of stock option returns: delta-hedged option return decreases monotonically with total volatility of the un- derlying stock. This is entirely driven by stock's idiosyncratic volatility. A portfolio strategy that sells calls on high volatility stocks and buys calls on low volatility stocks (both delta-hedged) earns about 2% per month. Our results are stronger when cost of arbitrage between stocks and options is higher. They can not be explained by standard stock market risk factors, stock characteristics or volatility risk premium. They are distinct from known volatility related option mispricing. They are consistent with market makers charging higher premia for options on high idiosyncratic volatility stocks
because they have higher arbitrage costs and more informed trading.
학회소식
공지사항
[2011년 제 4차] Cross-section of Option Returns and Stock Volatilit
작성자 : 관리자
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게시일 :
2011-12-07