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Realized Volatility, the Good and the Bad

Posted on June 5, 2024 By 
Realized volatility (RV) refers to the actual movement of an asset’s price over a specific period, typically measured using high-frequency data. Unlike implied volatility, which is derived from options prices and reflects market expectations, realized volatility is computed from historical price data and provides an empirical measure of how much …
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Stock Returns After Extreme Loss Events

Posted on June 1, 2024 By 
An extreme loss event in the stock market refers to a sudden and significant decline in stock prices, often resulting from unexpected and severe market conditions. These events, also known as market crashes or financial crises, can be triggered by a variety of factors including economic downturns, geopolitical tensions, natural …
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Term Structure of Expected Stock Returns

Posted on May 28, 2024 By 
In the financial literature and media, we often encounter the concept of term structure, such as the term structure of volatility and the term structure of interest rates. Reference introduced the concept of term structure of expected stock returns. Essentially, the author utilizes options data to first calculate a …
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Profitability of Cross-Sectional Momentum Strategy

Posted on May 24, 2024 By 
Cross-sectional momentum is an investment strategy that involves ranking and selecting assets based on their past performance relative to their peers. Unlike time-series momentum, which looks at an individual asset’s past performance in isolation, cross-sectional momentum compares multiple assets to each other. Investors buy the top-performing assets and sell the …
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An Options Pricing Model for Non-Frictionless Markets

Posted on May 20, 2024 By 
The traditional option pricing model assumes that the market is frictionless. However, a body of research has developed theories that do not make this assumption. Reference utilizes the Stochastic Arbitrage (SA) approach to derive price bounds within which the admissible risk-neutral option prices, which are determined by using the …
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Volatility Risk Premium Is a Reward for Bearing Overnight Risk

Posted on May 16, 2024 By 
The volatility risk premium (VRP) represents the difference between the implied volatility of options and the realized volatility of the underlying asset. Essentially, it reflects the compensation that investors demand for bearing the risk associated with the uncertainty of future volatility. Typically, implied volatility is higher than realized volatility, indicating …
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Can Hypothesis Testing Reduce Data Mining Risks?

Posted on May 12, 2024 By 
A significant challenge in designing trading strategies is the data mining problem, which arises from the vast amount of data available and the potential for spurious correlations. With an abundance of historical market data, traders may inadvertently identify patterns or relationships that appear significant but are merely coincidental. This can …
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Do Calendar Anomalies Still Exist?

Posted on May 8, 2024 By 
Calendar anomalies in the stock market refer to recurring patterns or anomalies that occur at specific times of the year, month, or week, which cannot be explained by traditional financial theories. These anomalies often defy the efficient market hypothesis and provide opportunities for investors to exploit market inefficiencies. Some well-known …
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Volatility Spillover Between Developing Markets

Posted on May 4, 2024 By 
Volatility spillover refers to the transmission of volatility shocks from one market or asset to another, leading to increased volatility in the receiving market. These spillovers can occur within the same asset class or across different asset classes. For instance, a sudden increase in volatility in one stock market may …
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Predicting Realized Volatility Using Skewness and Kurtosis

Posted on April 30, 2024 By 
Realized volatility refers to the actual volatility experienced by a financial asset over a specific period, typically computed using historical price data. By calculating realized volatility, investors and analysts can gain insights into the true level of price variability in the market, which can be valuable for risk management, portfolio …
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