Implied volatility duration: A measure for the timing of uncertainty resolution

Abstract

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average more than five percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that 'late' stocks can only have higher expected returns than 'early' stocks, if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.

Empirical Asset Pricing with Multi-Period Disaster Risk: A Simulation-Based Approach

“…Such an investor will demand a premium to be compensated for exposure to the late resolution of uncertainty (when investing in pro-cyclical payoffs). This aspect of the equity premium is not accounted for by risk aversion, and Schlag et al (2020) provide empirical evidence of a notable late resolution premium. 37 In the multi-period disaster framework of our study, the RRA estimate remains plausible, and the IES estimate is greater than 1, which is consistent with late resolution premia and entails plausible asset pricing implications.…”

Option Return Predictability with Machine Learning and Big Data

“…Implied volatility duration (ivd ). Measure for the expected timeliness of the resolution of uncertainty, following Schlag, Thimme, and Weber (2020). It is defined as…”

Liquidity Derivatives

“…We complement this approach by providing a pricing model for financial claims which condition their payoff on market liquidity in exchange for a prespecified cash amount. Indeed, early resolution of uncertainty over future transactions commands a premium in the cross-section (Schlag et al, 2021). Market liquidity is intimately connected to funding liquidity (Gromb and Vayanos, 2002;Garleanu and Pedersen, 2007;Pelizzon et al, 2016) and limits to arbitrage (surveyed in Gromb and Vayanos, 2010).…”