Options market ambiguity and its information content

Qiang Chen and Yu Han

Journal of Financial Markets, 2023, vol. 64, issue C

Abstract: We enrich the literature by extracting ambiguity from the options market. Our results show that options market ambiguity contains information regarding future market excess returns, both in the U.S. market and international markets, and the predictive power of options market ambiguity is adjusted by the level of market fear indicated by the implied variance. The findings also show that the discount rate is a critical channel for the forecasting ability of options market ambiguity. The linkages between options market ambiguity and the bond and CDS spreads provide additional evidence for the relationship between ambiguity and the discount rate.

Keywords: Ambiguity measurement; Ambiguity aversion; Ambiguity-seeking; Market excess return predictability (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:64:y:2023:i:c:s1386418122000799

DOI: 10.1016/j.finmar.2022.100790

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