Forthcoming in Journal of Financial Economics
A portfolio that buys currencies with high equity tail beta and shorts those with low beta extracts the global component in the tail factor. The global tail factor is priced in currency carry and momentum portfolios, among other asset classes.
Forthcoming in Management Science
Option implied volatility change has significant cross-sectional predictive power for the underlying firms’ bond returns. The sign of predictability is different for bond returns and stock returns, consistent with Merton's capital structure model.
Journal of Financial and Quantitative Analysis (2021): 1-55
Combining the higher moment risk premia with the second moment risk premium improves the stock market predictability over multiple horizons, both in-sample and out-of-sample.
Journal of Empirical Finance, Vol. 47, No. 207--228, 2018
We find that idiosyncratic risk premium contributes to more than half of the expected return by estimating a GARCH-jump mixed model.
R&R at Management Science
AFA 2020, NYU Shanghai Volatility Institute Conference (Scheduled), WFA 2019, 2019 FMA Conference on Derivatives and Volatility, Concordia University, HEC Montreal, NFA Charlevoix 2018, Optionmetrics Conference 2018
This paper studies the effects of default risk on equity option returns. Under a stylized capital structure model, expected delta-hedged equity option returns have a negative relation with default risk, driven by firm leverage, asset volatility, and debt maturity. Empirically, we find that delta-hedged equity option returns monotonically decrease with higher default risk measured by credit ratings or default probability. We also find that default risk drives the predictability of existing anomalies in the equity option market. For all ten anomalies, the long-short option returns are higher for high default risk firms.
AFA 2020 , EasternFA 2019, MidwestFA 2019, SFS Calvacade Asia Pacific 2018, NFA 2018, CICF 2018, IFSID (CDI) conference 2018.
This paper studies the relation between the uncertainty of volatility and future delta-hedged equity option returns. We find that delta-hedged option returns consistently decrease in uncertainty of volatility. Our results hold for different measures of volatility such as implied volatility, EGARCH volatility from daily returns, and realized volatility from high-frequency data. The results are robust to firm characteristics, stock and option liquidity, volatility characteristics, jump risks, and are not explained by common risk factors. Our findings suggest that option dealers charge a higher premium for single-name options with high uncertainty of volatility, because these stock options are more difficult to hedge.
FMA 2019, CICF 2019, EasternFA 2019, MidwestFA 2019
Project funded by Canadian Derivatives Institute
This paper studies the factor structure in the cross-section of delta-hedged equity option returns. Using latent factor techniques, we ﬁnd strong evidence for the existence of a factor structure in equity options returns. We propose a four-factor model, which captures relevant latent factors and explains the time series and cross-section of equity option returns. The factors are the market volatility risk factor and three characteristic-based factors related to ﬁrm size, idiosyncratic volatility, and the diﬀerence between implied and historical volatilities. Stock return factors cannot price the cross-section of equity option returns.