Finance - Research Publications

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    Forecasting variance swap payoffs
    Dark, J ; Gao, X ; van der Heijden, T ; Nardari, F (WILEY, 2022-12-01)
    Abstract We investigate the predictability of payoffs from selling variance swaps on the S&P500, US 10‐year treasuries, gold, and crude oil. In‐sample analysis shows that structural breaks are an important feature when modeling payoffs, and hence the ex post variance risk premium. Out‐of‐sample tests, on the other hand, reveal that structural break models do not improve forecast performance relative to simpler linear (or state invariant) models. We show that a host of variables that had previously been shown to forecast excess returns for the four asset classes, contain predictive power for ex post realizations of the respective variance risk premia as well. We also find that models fit directly to payoffs perform as well or better than models that combine the current variance swap rate with a realized variance forecast. These novel findings have important implications for variance swap sellers, and investors seeking to include volatility as an asset in their portfolio.
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    Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market
    Goncalves-Pinto, L ; Grundy, BD ; Hameed, A ; van der Heijden, T ; Zhu, Y (Institute for Operations Research and the Management Sciences (INFORMS), 2020-09-01)
    Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.