Download Article 813.76 Kb

Options Order Flow, Volatility Demand and Variance Risk Premium

Multinational Finance Journal, 2017, vol. 21, no. 2, pp. 49-90
Prasenjit Chakrabarti , Indian Institute of Management Ranchi, India

Abstract:
This study investigates whether volatility demand information in the order flow of Indian Nifty index options impacts the magnitude of variance risk premium change. The study further examines whether the sign of variance risk premium change conveys information about realized volatility innovations. Volatility demand information is computed by the vega-weighted order imbalance. Volatility demand of options is classified into different categories of moneyness. The study presents evidence that volatility demand of options significantly impacts the variance risk premium change. Among the moneyness categories, volatility demand of the most expensive options significantly impacts variance risk premium change. The study also finds that positive (negative) sign of variance risk premium change conveys information about positive (negative) innovation in realized volatility.

Keywords : variance risk premium; volatility demand; model-free implied volatility; realized variance; options contract
View in Bib TeX Format      View Cite Format 1      View Cite Format 2      Structured Abstract