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Implied and Realized Volatility in the Cross-Section of Equity OptionsManuel AmmannUniversity of St. Gallen - Swiss Institute of Banking and Finance David SkovmandUniversity of Aarhus - Business and Social Sciences Michael VerhofenAllianz Global Investors; University of St. Gallen - Swiss Institute of Banking and Finance November 1, 2008 Abstract: Using a complete sample of US equity options, we analyze patterns of implied volatility in the cross-section of equity options with respect to stock characteristics. We find that high-beta stocks, small stocks, stocks with a low-market-to-book ratio, and non-momentum stocks trade at higher implied volatilities after controlling for historical volatility. We find evidence that implied volatility overestimates realized volatility for low-beta stocks, small caps, low-market-to-book stocks, and stocks with no momentum and vice versa. However, we cannot reject the null hypothesis that implied volatility is an unbiased predictor of realized volatility in the cross section.
Number of Pages in PDF File: 30 Keywords: Implied Volatility, Realized Volatility JEL Classification: G10 working papers seriesDate posted: January 8, 2009Suggested CitationContact Information
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