A New Index of Option Implied Absolute Deviation

Seminar abstract

This paper proposes a new index of forward-looking absolute deviation extracted from option prices. The new index, named ADIX, is model-free and easy to compute using at-the-money straddle prices.

An empirical analysis using S&P 500 options data for the time period 1996-2019 reveals that ADIX embeds useful information for forecasting future realized volatility and future returns.

The term structure of ADIX is consistent with the expectations hypothesis and short-term ADIX is economically significant and outperforms VIX in a mean-variance asset allocation exercise. The new index offers an alternative risk measure, more intuitive as a measure of dispersion, to study information embedded in option prices.

How to attend this seminar

This seminar is hosted online and is free to attend.

Please email EFiC for details on how to join.

Speaker bio

George Dotsis is an Associate Professor in Finance at the Department of Economics of the University of Athens. Before joining UoA, he worked as a lecturer and senior lecturer at Essex Business School, University of Essex. He holds a BSc in Economics from Athens University of Economics and Business, an MSc in Mathematical Finance from Cass Business School and a PhD in Finance from Athens University of Economics and Business.

His research interests are in the areas of asset pricing, derivatives valuation, financial econometrics and quantitative methods. His work has been published in journals such as the Journal of Banking and Finance, Journal of Empirical Finance, Journal of Futures Markets, Journal of International Money and Finance etc.