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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Option implied volatility measures and stock return predictability
AU - Fu, Xi
AU - Arisoy, Y. Eser
AU - Shackleton, Mark Broughton
AU - Umutlu, Mehmet
PY - 2016/8/1
Y1 - 2016/8/1
N2 - 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.
AB - 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.
KW - option-implied volatility
KW - volatility skew
KW - return predictability
U2 - 10.3905/jod.2016.24.1.058
DO - 10.3905/jod.2016.24.1.058
M3 - Journal article
VL - 24
SP - 58
EP - 78
JO - Journal of Derivatives
JF - Journal of Derivatives
SN - 1074-1240
IS - 1
ER -