Corridor Volatility Risk and Expected Returns

George Dotsis, Nikolaos Vlastakis

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)488-505
Number of pages18
JournalJournal of Futures Markets
Volume36
Issue number5
DOIs
Publication statusPublished - 1 May 2016
Externally publishedYes

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