Lottery and bubble stocks and the cross‐section of option‐implied tail risks

Sobhesh Kumar Agarwalla, Sumit Saurav and Jayanth Varma

Journal of Futures Markets, 2022, vol. 42, issue 2, 231-249

Abstract: The options smile provides forward‐looking information about the risk at the center of the distribution (ATM‐IV) and at the tails (Skew). We investigate the cross‐sectional determinants of the options smile using indices that capture firm fundamental risks, heterogeneity in belief, lottery characteristics, and bubble characteristics. We find that at‐the‐money (ATM) volatility is explained mainly by historical risks and predicted future risks measured using accounting‐based risk measures and firm characteristics. However, the cross‐sectional variation in the skew is driven by risk premia and by buying and selling pressure, which is influenced by heterogeneity in belief and the underlying's lottery‐like and bubble‐like characteristics.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/fut.22263

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:42:y:2022:i:2:p:231-249

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().