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      Is volatility risk priced in the securities market? evidence from S&P 500 index options

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      Author(s)
      Arisoy, Y. E.
      Salih, A.
      Akdeniz, L.
      Date
      2007
      Source Title
      The Journal of Futures Markets
      Print ISSN
      0270-7314
      Electronic ISSN
      1096-9934
      Publisher
      John Wiley & Sons
      Volume
      27
      Issue
      7
      Pages
      617 - 642
      Language
      English
      Type
      Article
      Item Usage Stats
      176
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      240
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      Abstract
      The authors examine whether volatility risk is a priced risk factor in securities returns. Zero-beta at-the-money straddle returns of the S&P 500 index are used to measure volatility risk. It is demonstrated that volatility risk captures time variation in the stochastic discount factor. The results suggest that straddle returns are important conditioning variables in asset pricing, and investors use straddle returns when forming their expectations about securities returns. One interesting finding is that different classes of firms react differently to volatility risk. For example, small firms and value firms have negative and significant volatility coefficients, whereas big firms and growth firms have positive and significant volatility coefficients during high-volatility periods, indicating that investors see these latter firms as hedges against volatile states of the economy. Overall, these findings have important implications for portfolio formation, risk management, and hedging strategies.
      Permalink
      http://hdl.handle.net/11693/23430
      Published Version (Please cite this version)
      http://dx.doi.org/10.1002/fut.20242
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      • Department of Economics 724
      • Department of Management 639
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