Implied Volatility Duration: A measure for the timing of uncertainty resolution

Christian Schlag, Julian Thimme and Rüdiger Weber

No 265, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average more than five percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that 'late' stocks can only have higher expected returns than 'early' stocks, if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.

Keywords: preference for early resolution of uncertainty; implied volatility; cross-sectionof expected stock returns; asset pricing (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mac and nep-upt
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:265

DOI: 10.2139/ssrn.2881993

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