Archive | Ivory Tower Incidentals

Investors Still Haven’t Understood Leveraged ETFs

Monday, November 29, 2010

1 Comment

When leveraged and inverse ETFs were first launched, many investors weren't aware of the negative effects that daily rebalancing would have on the long-term performance of those ETFs relative to...

New Research: Sentiment, Expectations, and Stat Arb

Wednesday, January 6, 2010


Some interesting articles have been added to the forthcoming list at Quantitative Finance. Cites and abstracts are below, with links to preprints where available. I don’t have time to add commentary at the moment, but am happy to answer questions in the comments section. Abel Rodriguez & Enrique Ter Horst, “Measuring expectations in options markets: an application to the S&P500 index.” Extracting market expectations has always been an important issue when making national policies and investment…

Loss Aversion, Behavioral Finance, and the Asymmetry of Volatility and Returns

Wednesday, November 11, 2009


M. Levy, “Loss aversion and the price of risk,” Quantitative Finance (forthcoming): Abstract: This paper derives a simple theoretical relationship between the degree of loss aversion, the concavity/convexity of the value function, and the equilibrium market price of risk. We show that while the degree of loss aversion is key in determining the market price of risk, the convexity/concavity of the value function is much less important in this respect. The theoretical relationship obtained is tested…

Should You Be Buying or Selling Options?

Tuesday, October 20, 2009


Hayne E. Leland, “Options and Expectations,” UC-Berkeley Research Program in Finance Working Paper RPF-267, October 1996. Abstract: Who should buy options (ordinary or “exotic”), and who should sell? Buyers and sellers must differ from the average investor, who will not undertake options positions. We develop a simple binomial model to characterize the expectations (relative to the average or consensus) which must be held by investors to justify buying or selling various types of derivatives, or following dynamic…

Straddles and the Volatility Risk Premium

Wednesday, September 30, 2009


Felix Goltz and Wan Ni Lai, “Empirical Properties of Straddle Returns,” The Journal of Derivatives 17:1 (Fall 2009), 38-48. Abstract: An at-the-money (ATM) straddle, i.e., going long an ATM call and an ATM put with the same maturity, is generally thought of as a volatility trade. It is essentially delta-neutral, but a large price move in either direction or an increase in implied volatility will produce a profit. A delta-neutral straddle position also has zero beta, so…

Dragon-Kings, Black Swans and the Prediction of Crises

Thursday, September 17, 2009


Dider Sornette, “Dragon-Kings, Black Swans and the Prediction of Crises,” Abstract: We develop the concept of “dragon-kings” corresponding to meaningful outliers, which are found to coexist with power laws in the distributions of event sizes under a broad range of conditions in a large variety of systems. These dragon-kings reveal the existence of mechanisms of self-organization that are not apparent otherwise from the distribution of their smaller siblings. We present a generic phase diagram to explain…

The Impact of Volatility Derivatives

Thursday, September 10, 2009

1 Comment

Paul Dawson and Sotiris K. Staikouras, “The Impact of Volatility Derivatives on S&P 500 Volatility,” Journal of Futures Markets advance online (2009). This study investigates whether the newly cultivated platform of volatility derivatives has altered the volatility of the underlying S&P500 index. The findings suggest that the onset of the volatility derivatives trading has lowered the volatility of both the cash market volatility and the cash market index, and significantly reduced the impact of shocks to volatility.…

Selling Options on Treasury Bonds

Tuesday, September 1, 2009

1 Comment

David P. Simon, “Examination of long-term bond iShare option selling strategies,” Journal of Futures Markets advance online (2009). This article examines volatility trades in Lehman Brothers 20+ Year US Treasury Index iShare (TLT) options from July 2003 through May 2007. Unconditionally selling front contract strangles and straddles and holding for one month is highly profitable after transactions costs. Short-term option selling strategies are enhanced when implied volatility is high relative to time series volatility forecasts. Risk management…

The Limits of Arbitrage

Wednesday, August 26, 2009


Let’s get this series started off right. Andrei Shleifer and Robert W. Vishny, “The Limits of Arbitrage,” The Journal of Finance 52:1 (1997). Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people’s capital. Such professional arbitrage has a number of interesting implications for security pricing, including…

New Series: Ivory Tower Incidentals

Sunday, August 23, 2009

1 Comment

My research agenda – finance and otherwise – is longer than ever and I’m equally further behind. One thing blogging has taught us all is that the pace of thought required to tackle complicated, multi-faceted problems is often incongruous with the pace at which pithy bloggers operate. Imagine if the Critique of Pure Reason had been published in two-hundred-word pieces. Shudder. So given the choice between research progress and consistency in blogging, I want to opt for the former. But…


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


Open All | Close All