We
introduce Implied Volatility Duration (IVD) as a new measure for the
timing of the resolution of uncertainty about a stock's cash flows. The
shorter the IVD, the earlier the resolution of uncertainty. Portfolio
sorts indicate that investors demand on average about seven percent
return per year in exchange for a late resolution of uncertainty, and
this premium cannot be explained by standard factor models. We find that
the premium is higher in times of increased economic uncertainty and
low market returns. We show in a general equilibrium model that the
expected excess returns on high IVD stocks exceed those of low IVD
stocks if and only if the investor's relative risk aversion exceeds the
inverse of her elasticity of intertemporal substitution, i.e., if she
exhibits a `preference for early resolution of uncertainty' in the
spirit of Epstein and Zin (1989). Our empirical analysis thus provides a
purely market-based assessment of the relation between two preference
parameters, which are usually hard to estimate. |
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