The Effects of Hedgers and Speculators on the Implied Volatility Skew: A Transactions Data Study (original) (raw)
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This pap,t,w:mina w rtl.a:il,i MIWffl w prldnf o;JJIOCk inda funuocoNl'OCU 41114 :iv impiuti volatiJii of illda4lll4ittdivui equirf opna11,:, Ford.= frr"'t w 1986-1988 pmDd, rite '1ffarnt:11�w implild volaziJiaf cl1ils andpuaonw Standard and Poor'.i lOQind.a ap;,e,,nttJ be doHiy ""-' ro l'GIWZionin rhe p,r,,wunar �ofdw 1'1lfjor U.S.-/TtUWd {111.wa Allll1'GCU W, � 1111 llrlnlnrgt � to n;pparr rhis ob#1'VOtiln.. Ru.son: an rwo offered for wft,rding riuztin.dapr,t1vouui/i,tiaafti � forull.t during w e,uw sampli! pmod. This paper ewnines futwa pricing aJJd its interaction with options pricing. Becu:lsc forward and reverse convemom involve the difficult endeavor of buying and selling an iIJdcx portfolio, �maybe violations of put-call parity as well as diffcrem: prices for traded futun:s contracU and synthetic futures formed from options. Rubinstein (1987] reviews this �. wb.ile noting that academic studies of incl= optiom arc sparse. Bmmer [1987] addresses the effeas of interest rate risk, � settlement, and disc:tct dividend flows on .index option prices. Whaley {1986] fuim that the implied volarility of puts was higher than that of calls in the market for options on� futur:s, as did .Evnine and Rudd [1985] for s&P 100 ind= options. Rubinstein [1985] discovers maturity and moncyness biases using transact data on equity options from the Chicago Board Options E:rcliange. Figlewski [1985] shows that the pricing of New York Composite inde:it options is cioser to the futures conttact than to tbecashindcx. In theory, the equilibriu �tum from selling index funm:s short while simuJtmeousty buying an mdc:r-rnirnicking portfolio of stocks should be equal to the riskJ.es rate of iDtcrest Various ti:aaires of c=:ution, such as bid-ask spream and the m:arm impact of actual orders, create an indiifcxl:ICC band around the theoretical a>st-of-cany value of the futures contract. Violatiom of this pricing relation can be analyzed� related to options markets that nmction as parallel or synthetic futures markets. '. ! This paper attempts to document such a relation. That is, changes in the furures premium or discount are correlated with changes in the magrurude of the ..
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SSRN Electronic Journal
Many attempts have been made to estimate market characteristics from options prices, none more well known than the Black Scholes model. Yet, no options pricing model is without significant criticism. And none are consistent with the characteristics of the market discussed in this paper. Prior to developing a pricing model, it is important to delve deep into the market that is to be modeled. It is the author’s belief that important characteristics of securities markets and how securities are priced are ignored by many pricing models. In particular, these often-ignored characteristics of securities markets that this paper emphasizes are: 1. Securities markets are not homogenous; investors have different perspectives. 2. Investors are risk averse. 3. Most investors sit on the sidelines, choosing not to invest in a particular asset; as a result, assets are priced by outliers in the market, not investors that are representative of the market. 4. Options prices are set by investors with different objectives; options prices tell us less about those who do invest than they do about those who do not invest. This paper attempts to make a compelling case that each of these market characteristics is true and relevant. The paper concludes that analysts pricing securities in general, and options models in particular, may achieve deeper insights by understanding not why an investor bought or wrote an option at a particular price, but why that price does not align with the utility function of most investors.
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We examine the implied volatility of TAIEX options with the net buying pressure hypothesis. Empirical results find that the implied volatility of TAIEX options exhibits negative skewness, which is caused by the net buying pressure and is dependent on the time-to-maturity of the options contract. The effect of net buying pressure is most significant in options with longer maturity. After controlling the information flow and leverage effect, our empirical results show that net buying pressure is attributed to limits to arbitrage in the Taiwan options market. As institutional investors have greater hedging demand for out-of-the-money puts, we also conclude that net buying pressure has the biggest influence on the implied volatility of out-of-the-money puts. The trading simulation results support the net buying pressure hypothesis. Finally, we also show that Taiwan's option investors are volatility traders.