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The Relation between information in option prices and short term market return

Stille, Henrik (2005)
Department of Economics
Abstract
Abstract The purpose of this thesis is to analyze if implied volatility and the implied risk neutral density function can predict short term market return of the Swedish OMX-index. To study the relation between information in option prices and short term market return I perform and OLS-regression with the market return as dependent variable. Implied volatility and the various moments of the implied density function are used as independent variables. Data from the Swedish OMX-index at the Stockholm Stock Exchange for the period September through December 2002 is used in the study. The study shows that high implied volatility of at the money options predicts a positive return on the OMX-index in the next three days. The prediction power is... (More)
Abstract The purpose of this thesis is to analyze if implied volatility and the implied risk neutral density function can predict short term market return of the Swedish OMX-index. To study the relation between information in option prices and short term market return I perform and OLS-regression with the market return as dependent variable. Implied volatility and the various moments of the implied density function are used as independent variables. Data from the Swedish OMX-index at the Stockholm Stock Exchange for the period September through December 2002 is used in the study. The study shows that high implied volatility of at the money options predicts a positive return on the OMX-index in the next three days. The prediction power is also strong for the third moment of the implied density function i.e. skewness. Key words: option prices, implied volatility, short term return, mean reversion, implied risk neutral density function (Less)
Please use this url to cite or link to this publication:
author
Stille, Henrik
supervisor
organization
year
type
M2 - Bachelor Degree
subject
keywords
option prices, implied volatility, short term return, mean reversion, implied risk neutral density function, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1336419
date added to LUP
2005-02-06 00:00:00
date last changed
2010-08-03 10:49:14
@misc{1336419,
  abstract     = {{Abstract The purpose of this thesis is to analyze if implied volatility and the implied risk neutral density function can predict short term market return of the Swedish OMX-index. To study the relation between information in option prices and short term market return I perform and OLS-regression with the market return as dependent variable. Implied volatility and the various moments of the implied density function are used as independent variables. Data from the Swedish OMX-index at the Stockholm Stock Exchange for the period September through December 2002 is used in the study. The study shows that high implied volatility of at the money options predicts a positive return on the OMX-index in the next three days. The prediction power is also strong for the third moment of the implied density function i.e. skewness. Key words: option prices, implied volatility, short term return, mean reversion, implied risk neutral density function}},
  author       = {{Stille, Henrik}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Relation between information in option prices and short term market return}},
  year         = {{2005}},
}