Risk Premia in Index Option Returns

Suk Joon Byun,Byungsun Min 한국재무학회 2011 한국재무학회 학술대회 Vol.2011 No.05

This paper investigates which risk premium plays a key role in explaining index option returns. We find that variance risk premium is necessary to explain the option returns by (i) using discrete-time option pricing models which can reflect variance risk premium properly even for short-term, in order to overcome the limitation of continuous-time stochastic volatility models, and (ii) examining various types of index option returns that provide more definite analysis on the impact of risk premiums on the option returns. Variance risk premium can explain the 1-month holding period returns of 2-month maturity straddles which are significantly negative as well as the call returns which are decreasing with moneyness and negative for outof- the-money. On the contrary, jump risk premium that previous studies emphasize for option returns cannot account for the two observed facts. These results come from the ability of risk premiums to capture the wedge between the physical and riskneutral volatilities which substantially determines option returns.

Improving the predictability of stock market returns with the growth of options open interest

Suk Joon Byun,Jun Sik Kim 한국재무학회 2013 한국재무학회 학술대회 Vol.2013 No.05

The purpose of this paper is to show that the growth of options open interest has predictive power for stock market returns. Predictability is demonstrated through in-sample tests, as evidenced by significant p-values and the improvement of adjusted R2 in monthly predictive regressions, and out-of-sample metrics. In addition, the stock return predictability confirms the economic significance, as shown by improving Sharpe ratios of returns from a predictor variablebased decision rule that exploit the growth of options open interest. Our empirical evidence indicates that the growth of options open interest contains additional information for future stock market returns, relative to other popular predictor variables.

Is Stochastic Volatility Priced on KOSPI 200 Index Options ?

Suk Joon Byun,Sun-Joong Yoon 한국재무학회 2007 한국재무학회 학술대회 Vol.2007 No.04

This study investigates whether stochastic volatility is priced on KOPSI 200 index options by using the delta-hedged gains on a portfolio of a long position in a call, hedged by a short position in the underlying asset, following Bakshi and Kapadia (2003). Contrary to other financial markets such as the S&P index options market, volatility risk is not systematically and consistently compensated on the KOSPI options. Rather jump fear influences most in determining KOSPI 200 option prices. Our results are consistent with extant literatures which have shown that Korean derivatives market is dominated by directional traders, and so there might be no hedging demands on option trades. In our research, we do not impose any specification on the stochastic processes of the underlying asset, volatility, and jumps, consequently setting our results free from misspecification errors.

Momentum crashes and the 52-week high

Suk-Joon Byun(변석준),Byoung-Hyun Jeon(전병현) 한국경영과학회 2016 한국경영과학회 학술대회논문집 Vol.2016 No.10

Despite their strong performance, momentum strategies suffer from occasional large drawdowns referred to as momentum crashes. In this paper we address the question of why momentum crashes by identifying its cross-sectional determinant: nearness to 52-week high. We provide robust empirical finding that stocks far from their 52-week highs outperform stocks near their 52-week highs during the momentum crash periods, and the momentum crash is just a manifestation of such outperformance. We consider several explanation for the outperformance and find that inflow of anchoring susceptible investors is the most consistent explanation. Furthermore, we provide a revised momentum strategy that is neutral on nearness to 52-week high. The strategy is free of crashes and exhibits a normal-like distribution without sacrificing its profitability.

CLOSED-FORM UPPER BOUNDS FOR THE OPTIMAL EXERCISE BOUNDARY OF AMERICAN PUT

Suk Joon Byun 한국산업응용수학회 2006 한국산업응용수학회 학술대회 논문집 Vol.1 No.2

Kim (1990), Jacka (1991), and Carr, Jarrow, and Myneni (1992) showed that American option price is equal to the corresponding European option price plus an integral representing the early exercise premium. While the American option price has an explicit representation, the optimal exercise boundary is implicitly defined by a nonlinear integral equation. This article studies the properties of integral equations arising in the valuation of American options. Based on the properties of integral equations, this article also presents a series of closed form upper bounds for the optimal exercise boundary.

Forecasting Future Volatility from Option Prices Under the Stochastic Volatility Model

Suk Joon Byun,Sol Kim,Dong Woo Rhee 한국재무학회 2009 한국재무학회 학술대회 Vol.2009 No.05

The implied volatility from Black and Scholes (1973) model has been empirically tested for the forecasting performance of future volatility and commonly shown to be biased. Based on the belief that the implied volatility from option prices is the best estimate of future volatility, this study tries to find out a better model, which can derive the implied volatility from option prices, to overcome the forecasting bias from Black and Scholes (1973) model. Heston (1993)’s model which improves on the problems of Black and Scholes (1973) model the most for pricing and hedging options is one candidate, and VIX which is the expected risk neutral value of realized volatility under the discrete version is the other. This study conducts a comparative analysis on the implied volatility from Black and Scholes (1973) model, that from Heston (1993)’s model, and VIX for the forecasting performance of future volatility. From the empirical analysis on KOSPI200 option market, it is found that Heston (1993)’s implied volatility eliminates the bias mostly which Black and Scholes (1973) implied volatility has. VIX, on the other hand, does not show any improvement for the forecasting performance.

The Role of the Variance Premium in GARCH Option Pricing Models

Suk Joon Byun,Byoung-Hyun Jeon,Byungsun Min,Sun-Joong Yoon 한국재무학회 2014 한국재무학회 학술대회 Vol.2014 No.05

We develop a discrete-time option pricing model using a variance-dependent pricing kernel of Christoffersen, Heston and Jacobs (2013) under an economic framework allowing for dynamic volatility and dynamic jump intensity. Using this model, we examine the role of the variance premium and jump risk premium in explaining S&P 500 index option returns. Our results stress the importance of the variance premium in explaining the stylized characteristics of index option returns, including short-term option returns, which are insufficiently explained by extant option pricing models. In particular, the variance premium can explain both 1-month holding period returns of 2-month maturity straddles, which are significantly negative, and call returns, which decrease according to moneyness. Even though the jump risk premium emphasized in the previous literature is able to well fit the option prices, it does not improve the explanatory power for the above two stylized option returns. The outperformance of the variance premium stems from its ability to capture the wedge between physical and risk-neutral volatilities.

RELATIONSHIPS BETWEEN AMERICAN PUTS AND CALLS ON FUTURES CONTRACTS

SUK JOON BYUN,IN JOON KIM 한국산업응용수학회 2000 Journal of the Korean Society for Industrial and A Vol.4 No.2

Economic Catastrophe Bonds : Comment

Suk Joon Byun,Da Hea Kim 한국재무학회 2012 한국재무학회 학술대회 Vol.2012 No.08

Coval, Jurek and Stafford (2009, hereafter CJS) present a state-contingent framework for pricing CDO, in which they integrate the generalized form of Merton’s (1974) structural model with the CAPM. We demonstrate that this seemingly intuitive model violates a risk-neutral valuation relationship, and therefore results in biased state-contingent payoffs of the firm’s asset. We suggest a correct and generalized model, and revisit the pricing of CDO. We argue that this modification, though not translating into any significant difference in pricing traded CDOs, enable CJS to be a more accurate and strict, and thus powerful one. Coval, Jurek and Stafford (2009, hereafter CJS) modify Merton’s (1974) model in a way that asset returns are driven by a combination of market shocks, Zm, and idiosyncratic shocks, Zi,ε. In their model, the sensitivity of asset returns to market shocks is assumed to be proportional to its CAPM beta. Also, most important, they leave the distribution of the market shocks unspecified, allowing asset returns to have arbitrary, non-Gaussian distributions. Furthermore, they impose a restriction on excess returns under the name of the Sharpe (1964) and Lintner (1965) CAPM requirement. This seemingly intuitive model of CJS, however, has some drawbacks. In this comment, we point out two of them and suggest a modified model where they can be resolved.

The Information content of the risk-neutral skewness for Volatility Forecasting

Suk Joon Byun,Jun Sik Kim 한국재무학회 2011 한국재무학회 학술대회 Vol.2011 No.05

This paper investigates the information content of the risk-neutral skewness derived from S&P 500 index option prices for forecasting future volatility. Empirical results show that the risk-neutral skewness provides incremental explanatory power for future volatility. Moreover, the models with the risk-neutral skewness dominate in terms of out-of-sample forecasting performance, especially during the 2007-2008 financial crisis.