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Overreactions in the Options Market

Overreactions in the Options Market ABSTRACT This paper examines the “term structure” of options' implied volatilities, using data on S&P 100 index options. Because implied volatility is strongly mean reverting, the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option. Empirically, this elasticity turns out to be larger than suggested by rational expectations theory—long‐maturity options tend to “overreact” to changes in the implied volatility of short‐maturity options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Overreactions in the Options Market

The Journal of Finance , Volume 44 (4) – Sep 1, 1989

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References (17)

Publisher
Wiley
Copyright
1989 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1989.tb02635.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper examines the “term structure” of options' implied volatilities, using data on S&P 100 index options. Because implied volatility is strongly mean reverting, the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option. Empirically, this elasticity turns out to be larger than suggested by rational expectations theory—long‐maturity options tend to “overreact” to changes in the implied volatility of short‐maturity options.

Journal

The Journal of FinanceWiley

Published: Sep 1, 1989

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