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    Lottery and bubble stocks and the cross-section of option-implied tail risks

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    Date
    2021-09-15
    Author
    Agarwalla, Sobhesh Kumar
    Saurav, Sumit
    Varma, Jayanth R.
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    Abstract
    The options smile provides forwardlooking information about the risk at thecenter of the distribution (ATMIV) and at the tails (Skew). We investigate thecrosssectional determinants of the options smile using indices that capturefirm fundamental risks, heterogeneity in belief, lottery characteristics, andbubble characteristics. We find that atthemoney (ATM) volatility is explainedmainly by historical risks and predicted future risks measured usingaccountingbased risk measures and firm characteristics. However, the crosssectional variation in the skew is driven by risk premia and by buying andselling pressure, which is influenced by heterogeneity in belief and the un-derlying's lotterylike and bubblelike characteristics.
    URI
    https://doi.org/10.1002/fut.22263
    http://hdl.handle.net/11718/24467
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