Houston TX
Legendary Market Wizard
Experience: Advanced
Platform: TT Stellar & Tradestation
Broker: Primarily Advantage Futures
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
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Had to make a plane trip this week so grabbed a copy of June's Active Trader Magazine as something to read.
One of their articles was "Uncertainty as a Predictive Tool", which while not being particularly noteworthy, did reference a research paper "Stock Market Ambiguity and the Equity [AUTOLINK]Premium[/AUTOLINK]" (SSRN Link).Abstract:
We create a novel measure of stock market ambiguity that is derived from the dispersion of S&P 500 index options trading volume across strike prices. We show that, for the 1996:01–-2012:12 period, ambiguity consistently forecasts negative market excess returns for horizons up to two years ahead, exhibiting a predictive ability comparable to that of the variance risk premium (VRP) and outperforming all other traditional predictors considered both in-sample and out-of-sample. Moreover, trading strategies that are based on the out-of-sample forecasting power of stock market ambiguity at both the aggregate and the portfolio level provide a mean-variance investor with significant utility gains compared to a buy-hold strategy. We fi…nd that the information embedded in stock market ambiguity is not subsumed by other option-implied measures that proxy for variance and jump risk, or re‡flect investors' ’hedging demand. Our results are in line with equilibrium models that incorporate Bayesian learning and an elasticity of intertemporal substitution lower than one. When I get home I will probably download the paper and see whether I can make sense of it but was curious if anybody here was already aware of this or had looked at anything similair.
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