The Effects of the Risk Neutral Skewness on Implied Volatility Regressions

نویسندگان

  • Leonidas S. Rompolis
  • Elias Tzavalis
چکیده

This paper provides new insights into the sources of bias of the implied by option prices volatility to forecast its physical counterpart. This bias can be attributed to the volatility risk premium effects. The latter are found to depend on the high order cumulants of the risk neutral density. These cumulants capture the risk averse behavior of the investors in the stock and option markets for bearing the risk reflected into the deviations of the implied risk neutral distribution from the normal one. Based on an implied volatility regression model allowing for risk premium effects, the paper shows that the bias of the implied volatility slope to forecast the future level of its physical counterpart can be eliminated when the risk neutral third-order cumulant is included as a right hand side variable in the model. This cumulant captures the effects on volatility premium of possible extreme negative events in the stock market.

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تاریخ انتشار 2008