Cross-sectional drivers of systematic volatility risk: evidence from stock options

Abstract

In this paper, we study whether investors demand the systematic component of the volatility risk (VRP Beta) in the options market. We explore the possible determinants of the systematic component of the volatility risk. Using stock options listed on the National Stock exchange of India (NSE India), we report a strong existence of the systematic component of volatility risk beta in the single stock options market, which is both statistically and economically significant. The VRP Beta remains significant even in the presence of traditional Fama-French risk factors and various other robustness checks. Further, VRP Beta is found to be higher for stocks with relatively high tail risk and illiquid stocks and unrelated to size and volatility of the stock.