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The Fear and Exuberance from Implied Volatility of S&P 100 Index Options

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  • Cheekiat Low

    (National University of Singapore)

Abstract

I study the relation between option traders' risk perception and contemporaneous market conditions. Risk perception tends to increase when downside volatility increases more than upside volatility. The risk-return relation is asymmetric and nonlinear, best described as a downward-sloping reclined S-curve. That prior gains appear to have some mitigating effect on the fear of loss relative to prior losses points to a "house money" effect. Broader market conditions influence the perception of risk in a manner consistent with the "keeping up with the Joneses" effect. Leverage is a weak explanation for the risk-return relation.

Suggested Citation

  • Cheekiat Low, 2004. "The Fear and Exuberance from Implied Volatility of S&P 100 Index Options," The Journal of Business, University of Chicago Press, vol. 77(3), pages 527-546, July.
    • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:527-546
    DOI: 10.1086/386529
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