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Option implied volatility measures and stock return predictability

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1/08/2016
<mark>Journal</mark>Journal of Derivatives
Issue number1
Volume24
Number of pages21
Pages (from-to)58-78
Publication statusPublished
Original languageEnglish

Abstract

Using firm-level option and stock data, we examine the predictive ability of option-implied volatility measures proposed by previous studies and recommend the best measure using up-to-date data. Portfolio level analysis implies significant non-zero risk-adjusted returns on arbitrage portfolios formed on the call-put implied volatility spread, implied volatility skew, and realized-implied volatility spread. Firm-level cross-sectional regressions show that, the implied volatility skew has the most significant predictive power over various investment horizons. The predictive power persists before and after the 2008 Global Financial Crisis.