Is volatility risk priced in the securities market? evidence from S&P 500 index options
Date
2007Source 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
ArticleItem Usage Stats
176
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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.