Existing studies (e.g., Stein, 1989; and Poteshman, 2001) examine the impact of volatility shocks on
option prices and document a pattern of “short-horizon underreaction” and “long-horizon overreaction” in
the options market. These findings, however, are based on implied volatilities from specific option pricing
models and thus subject to model specification error. In this paper, we perform direct tests of options
market reaction to implied volatility shocks in a model-free framework. In contrast to the existing literature,
we document a quick reversal in volatility shocks, suggesting “short-horizon overreaction” in the options
market. Our further analysis shows that the patterns of misreaction documented in previous studies are
consistent with the effect of model misspecification. More importantly, we provide evidence that the quick
reversal in volatility shocks documented in our study is likely an illiquidity effect. Our results caution that
anomalous patterns of implied volatility shocks may not be evidence of market misreaction.
JEL Classification: G13, G14
학술대회/행사
학술대회안내
[2008년 제 4차] Implied Volatility Anomaly, Illiquidity, and New Ev
작성자 : 관리자
조회수 : 1049
게시일 :
2008-12-11