Testing the Volatility Term Structure Using Option Hedging Criteria

Testing the volatility term structure using option hedging criteria

The term structure of equity option implied volatility

This paper investigates the relationship between the slope of the implied volatility (IV) term structure and future option returns. In Fama-Macbeth regressions we demonstrate that implied volatility slopes are positively correlated with future returns on short-term at-the-month straddles. A strategy that buys straddles with high IV slopes and short sells straddles with low IV slopes returns sev...

Robust Hedging Performance and Volatility Risk in Option Markets

We investigate daily robust hedging performance with trading costs for markets of S&P 500 Index option (SPX) and Taiwan Index option (TXO). Robust hedging refers to minimal model dependence on the risky asset price. Two hedging categories including " model-free " and " volatility-model-free, " and nonparametric methods for volatility estimation are considered in our empirical study. In particul...

Long term spread option valuation and hedging

This paper investigates the valuation and hedging of spread options on two commodity prices which in the long run are cointegrated. For long term option pricing the spread between the two prices should therefore be modelled directly. This approach offers significant advantages relative to the traditional multi-factor spread option pricing model since the correlation between two asset returns is...

Hedging Volatility Risk

Volatility derivatives are becoming increasingly popular as means for hedging unexpected changes in volatility. Although pricing volatility derivatives demands extreme care in modeling the underlying volatility process, not much attention has been devoted to the complete specification of the autonomous process that volatility follows in continuous time. Despite the fact that jumps are widely co...