The Fear and Exuberance from Implied Volatility of S&P 100 Index Options

Cheekiat Low
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Cheekiat Low: National University of Singapore

The Journal of Business, 2004, vol. 77, issue 3, 527-546

Abstract: I study the relation between option traders' risk perception and contemporaneous market conditions. Risk perception tends to increase when downside volatility increases more than upside volatility. The risk-return relation is asymmetric and nonlinear, best described as a downward-sloping reclined S-curve. That prior gains appear to have some mitigating effect on the fear of loss relative to prior losses points to a "house money" effect. Broader market conditions influence the perception of risk in a manner consistent with the "keeping up with the Joneses" effect. Leverage is a weak explanation for the risk-return relation.

Date: 2004
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