Expected Option Returns

This paper catches volatility risk premium by examining HIS index option returns in the context of mainstream asset-pricing theory. In2001, Joshua D.Coval and Tyler Shumway published their paper Expected Option Returns. They were first to focus on the theoretical and empirical nature of American S&P index option returns, rather than volatilities or implied distributions, in the context of broader assert-pricing theory. This paper is using Coval and Shumway’s idea and method to examine HIS index option returns.This paper’conclusions is similar to Coval and Shumway’s. According to Coval and Shumway’s theory, under mild assumptions, expected call returns exceed those of the underlying security and increase with the strike price. Likewise, expected put option returns are below the risk-free rate and increase with the strike price. HIS index option returns consistently exhibit these characteristics. But under stronger assumptions, expected option returns vary linearly with option betas. However, HIS index option zero-beta straddle positions produce negative returns. This paper estimates Dybvig’s pricing kernel using HIS index option at-the-money zero-beta straddle positions returns in GMM. The estimation results suggests that BS/CAPM assumptions are not valid in Hongkong market. In the last, this paper regress five Hongkong securities’s returns on excess returns of the market and the excess returns of HIS index option zero-beta straddles. The regression results conform to our expections. All This suggests that some additional factor, such as stochastic volatility, is priced in option returns in Hongkong market.Although this paper’s conclusions are similar to Coval and Shum way’s, there are some details which are different to Coval and Shumway’s. The first, HIS index option returns are closer to zero than S&P index option returns. The second, the HIS index option BS betas are bigger than S&P index option BS beta. The last, the HIS index option zero-beta straddle positions return are closer to zero than S&P index option zero-beta straddle positions return. The difference between the returns of HIS index options and the returns of S&P index options are for four reasons. The first, American option market is different from Hongkong option market. The second, the period of this paper’s data is different from the period of Coval and Shumway’s data. The third, HIS index options maybe bear more market risk than S&P index options. The last, we don’t know the distribution of option returns, so the t-test can’t be the only standard of our conclusions about option returns.