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Corridor Volatility Risk and Expected Returns

Dotsis, G and Vlastakis, N (2016) 'Corridor Volatility Risk and Expected Returns.' Journal of Futures Markets, 36 (5). 488 - 505. ISSN 0270-7314

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Abstract

© 2015 Wiley Periodicals, Inc. This paper examines the pricing of volatility risk using SPX corridor implied volatility. We decompose model-free implied volatility into various components using different segments of the cross-section of out-of-the money put and call option prices. We find that only model-free volatility computed from the cross-section of out-of-the-money call option prices carries a significant negative risk premium in the cross-section of stock returns and subsumes all relevant information for forecasting future volatility. Our empirical results provide strong evidence that SPX out-of-the money put option prices do not contain useful information for pricing aggregate volatility risk in the cross-section of stock returns.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 04 Sep 2015 10:50
Last Modified: 30 Jan 2019 16:19
URI: http://repository.essex.ac.uk/id/eprint/14770

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