Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution

forthcoming in Journal of Financial Economics

Christian Schlag,
Julian Thimme,
Rüdiger Weber
Research Area:
Financial Markets
Feb 2020
Preference for early resolution of uncertainty, implied volatility, cross-section of expected stock returns, asset pricing

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross section of stocks indicate that investors demand on average more than five percent return per year as a compensation for a late resolution of uncertainty. In a general equilibrium model, we show that ‘late’ stocks can only have higher expected returns than ‘early’ stocks, if the investor exhibits a preference for early resolution of uncertainty. Our empirical analysis thus provides a purely market-based assessment of the timing preferences of the marginal investor.

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