Implied volatility duration: A measure for the timing of uncertainty resolution

Christian Schlag, Julian Thimme and Rüdiger Weber

Journal of Financial Economics, 2021, vol. 140, issue 1, 127-144

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 5% 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-section of expected stock returns; Asset pricing (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:1:p:127-144

DOI: 10.1016/j.jfineco.2020.11.003

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