Quotation Weber, Rüdiger. 2018. Implied Volatility Duration and the Early Resolution Premium. SFS Cavalcade, New Haven, Vereinigte Staaten/USA, 21.05.-24.05.


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Abstract

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of the resolution of uncertainty about a stock's cash flows. The shorter the IVD, the earlier the resolution of uncertainty. Portfolio sorts indicate that investors demand on average about seven percent return per year in exchange for a late resolution of uncertainty, and this premium cannot be explained by standard factor models. We find that the premium is higher in times of increased economic uncertainty and low market returns. We show in a general equilibrium model that the expected excess returns on high IVD stocks exceed those of low IVD stocks if and only if the investor's relative risk aversion exceeds the inverse of her elasticity of intertemporal substitution, i.e., if she exhibits a 'preference for early resolution of uncertainty' in the spirit of Epstein and Zin (1989). Our empirical analysis thus provides a purely market-based assessment of the relation between two preference parameters, which are usually hard to estimate.

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Status of publication Published
Affiliation External
Type of publication Paper presented at an academic conference or symposium
Language English
Title Implied Volatility Duration and the Early Resolution Premium
Event SFS Cavalcade
Year 2018
Date 21.05.-24.05.
Country United States/USA
Location New Haven
URL http://sfs.org/financecavalcades/2018-sfs-finance-cavalcade/

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Weber, Rüdiger (Details)
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