On the determinants of premiums in financial markets
This dissertation analyzes the pricing, exposures as well as information content of options. It aims to fill research gaps in the existing options-literature in the research fields of volatility-related pricing, option-exposures as well as option-implied information. It consists of three main chapters each of which is based on an individual study.
The first study (Chapter 2), A New Look at the Cross-Section of Option Returns and Volatility, analyzes the relationship between the low-volatility effect and the expensiveness effect in stock options. Building on intermediary asset pricing theory, we hypothesise a linkage between the two volatility-related patterns that is based on market maker positions and market imperfections. The results show that the low-volatility effect is present in high-expensiveness options whereas the expensiveness effect increases with volatility. These findings cannot be explained by market inefficiencies or times of crisis. The study highlights the importance of market makers in options markets, the role of volatility in option pricing and offers benefits for investors as the effects cannot be explained by common risk factors.
The second study (Chapter 3), Exposures of Delta-Hedged Option Portfolios, analyzes the exposures of delta-hedged option portfolios to different risks and firm characteristics. The results show that these option portfolios have exposure to volatility, skewness, kurtosis as well as volatility and skewness uncertainty which are mainly driven by idiosyncratic risks. Further, delta-hedged option portfolios also have exposure to most but not all firm characteristics. An analysis of the triangular relationship between delta-hedged option returns, stock return moments and firm characteristics shows that the exposure to firm characteristics is especially informative when the stock return moments indicate low risk. This suggests that firm characteristics hold additional information about the riskiness of the underlying and can be interpreted as alternative risk measures.
The third study (Chapter 4), A Tale of Two Crises Told by Options, analyzes and compares the Global Financial Crisis and the COVID-19 pandemic using option-implied information. Because option prices contain information about the conditional expected return distribution of the underlying (the risk-neutral density), they are particularly suited for analyses of crises. Our results show both fundamental differences and important similarities of the two crises. Additionally, the use of risk-neutral densities allows us to analyze reactions to significant events during each crisis and to ask whether the markets have entered a new regime after the systemic shock of the crises.