Is Volatility Risk Priced in the Securities Market ? Evidence from S&P 500 Index Options
Arisoy, Eser; Altay-Salih, Aslihan; Akdeniz, Levent (2007), Is Volatility Risk Priced in the Securities Market ? Evidence from S&P 500 Index Options, The Journal of Futures Markets, 27, 7, p. 617-642. http://dx.doi.org/10.1002/fut.20242
TypeArticle accepté pour publication ou publié
Journal nameThe Journal of Futures Markets
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Abstract (EN)The authors examine whether volatility risk is a priced risk factor in securities returns. Zero-beta at-the-money straddle returns of the S&P 500 index are used to measure volatility risk. It is demonstrated that volatility risk captures time variation in the stochastic discount factor. The results suggest that straddle returns are important conditioning variables in asset pricing, and investors use straddle returns when forming their expectations about securities returns. One interesting finding is that different classes of firms react differently to volatility risk. For example, small firms and value firms have negative and significant volatility coefficients, whereas big firms and growth firms have positive and significant volatility coefficients during high volatility periods, indicating that investors see these latter firms as hedges against volatile states of the economy. Overall, these findings have important implications for portfolio formation, risk management, and hedging strategies.
Subjects / KeywordsSaving and investment; Risk management; Empirical Asset Pricing; Options; Securities
JELG32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
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