Options Order Flow, Volatility Demand and Variance Risk Premium

Prasenjit Chakrabarty, Institute of Management Technology Ghaziabad, India
Kiran Kumar Kotha, Indian Institute of Management Indore, India

This study investigates whether volatility demand information in the order flow of Indian Nifty index options impacts the magnitude of variance risk premium change. The study further examines whether the sign of variance risk premium change conveys information about realized volatility innovations. Volatility demand information is computed by the vega-weighted order imbalance. Volatility demand of options is classified into different categories of moneyness. The study presents evidence that volatility demand of options significantly impacts the variance risk premium change. Among the moneyness categories, volatility demand of the most expensive options significantly impacts variance risk premium change. The study also finds that positive (negative) sign of variance risk premium change conveys information about positive (negative) innovation in realized volatility.

Keywords: variance risk premium; volatility demand; model-free implied volatility; realized variance; options contract;

Click here to download the full article (pdf)
Click here for more information

Bank Profitability and Regulation in Emerging European Markets

Maria Eleni Agoraki, Athens University of Economics and Business & Panteion University, Greece
Anastasios Tsamis, Panteion University, Greece

This paper investigates the effect of bank-specific, industry-specific and macroeconomic determinants, as well as the regulatory environment on the profitability of emerging European banking sector over the period 2000-2016. Banks in countries with higher capital requirements, market discipline and more restrictions on banking activities performed better, while the better-performing banks had excessive foreign ownership. Using dynamic frameworks, the empirical analysis reveals that performance is affected by bank-specific determinants like equity capital and bank size, while traditional activities lead to increased profitability. Obviously, the specific measures of economic policy must be oriented towards specific aspects of banking business. This is likely to set new standards in performance and efficiency, making bank management to address particular firm-specific issues, such as the composition of the balance sheet, the quality of the credit portfolio, as well as the range of financial products and services. Overall, our evidence shows that regulation, and balance sheets are all helpful in understanding bank profitability during the crisis.

Keywords: banking sector profitability; financial crisis; regulatory framework; emerging markets;

Click here to download the full article (pdf)
Click here for more information