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Title: Volatility uncertainty and the cross-section of option returns Authors:  Jie Cao - Chinese University of Hong Kong (Hong Kong) [presenting]
Abstract: The aim is to study how the uncertainty of volatility change predicts the cross-section of delta-hedged equity option returns. We use three estimators of time-varying daily volatility: option implied volatility, volatility of daily returns under EGARCH model, and realized volatility of intra-day returns. We find that delta-hedged option returns consistently decrease with the volatility of volatility change. The results are robust to firm characteristics, to stock and option liquidity, to volatility characteristics, to jump risks, and are not explained by standard risk factors. It suggests that option dealers charge a higher premium for options on high volatility uncertainty stocks which are more difficult to hedge.