Ambiguity attitudes, volatility and option pricing: evidence from US equity and index options
Tarik Driouchi – King’s College London, Lenos Trigeorgis – University of Cyprus & Ha Yan So – King’s College London

Financial crises and other extreme events are characterised by ambiguity or so called Knightian uncertainty. This paper examines empirically the effect of option implied ambiguity aversion on stock (index) volatility over the period 2003-2010. We develop option pricing models using multiple-priors to monitor investment sentiment under uncertainty and underline the incremental information content of investors’ ambiguity attitudes in the implied-realised volatility relation. Although present in normal times, ambiguity effects are found to be more pronounced during periods of uncertainty and economic stress. Results and conclusions hold for call and put option instruments at different levels of moneyness using daily, weekly and monthly data specifications.

Tarik Driouchi is an Associate Professor: University Senior Lecturer in Financial Management at King’s College London, University of London. His research is in the area of investment and decision-making under uncertainty, examining real options and options markets. His work appears in OMEGA-The International Journal of Management Science, European Journal of Operational Research, Journal of World Business, OR Spectrum, Transportation Research B and Advances in Risk Management among others. To know more…