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The Fear and Exuberance from Implied Volatility of S&P 100 Index Options

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  • Cheekiat Low

    (National University of Singapore)

Abstract

I study the relation between option traders' risk perception and contemporaneous market conditions. Risk perception tends to increase when downside volatility increases more than upside volatility. The risk-return relation is asymmetric and nonlinear, best described as a downward-sloping reclined S-curve. That prior gains appear to have some mitigating effect on the fear of loss relative to prior losses points to a "house money" effect. Broader market conditions influence the perception of risk in a manner consistent with the "keeping up with the Joneses" effect. Leverage is a weak explanation for the risk-return relation.

Suggested Citation

  • Cheekiat Low, 2004. "The Fear and Exuberance from Implied Volatility of S&P 100 Index Options," The Journal of Business, University of Chicago Press, vol. 77(3), pages 527-546, July.
  • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:527-546
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    23. Hassan, M. Kabir & Kayhana, Selim & Bayatb, Tayfur, 2016. "The Relation between Return and Volatility in ETFs Traded in Borsa Istanbul: Is there any Difference between Islamic and Conventional ETFs?," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 24, pages 45-76.
    24. Birru, Justin & Figlewski, Stephen, 2012. "Anatomy of a meltdown: The risk neutral density for the S&P 500 in the fall of 2008," Journal of Financial Markets, Elsevier, vol. 15(2), pages 151-180.

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