Abstract

http://ssrn.com/abstract=1511970
 
 

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Implied Volatility Spreads, Skewness and Expected Market Returns


Yigit Atilgan


Sabanci University

Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

K. Ozgur Demirtas


CUNY Baruch College - Zicklin School of Business

July 14, 2010


Abstract:     
This paper investigates the intertemporal relation between implied volatility spreads and expected returns on the aggregate stock market. The results show a signifi…cantly negative link between expected future returns and the spread between the implied volatilities of out-of-the-money put and at-the-money call options written on the S&P 500 index. We argue that this relation is driven by information flow from option markets to stock markets rather than volatility spreads acting as a proxy for skewness. First, neither physical nor risk-neutral skewness can predict expected aggregate returns. Second, the relation between volatility spreads and expected market returns is signi…ficantly stronger for the periods that S&P 500 constituent …firms announce their earnings and for the periods that consumer sentiment index is extremely high or low. The intertemporal relation between volatility spreads and expected market returns remains strongly negative after controlling for various measures of conditional volatility, a large set of macroeconomic variables, small sample biases, and distributional assumptions.

Number of Pages in PDF File: 34

Keywords: implied volatility spreads, conditional skewness, expected market return, information ‡flow, intertemporal risk-return relation

JEL Classification: G10, G11, G12, C13, E32, E37

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Date posted: November 25, 2009 ; Last revised: March 20, 2013

Suggested Citation

Atilgan, Yigit and Bali, Turan G. and Demirtas, K. Ozgur, Implied Volatility Spreads, Skewness and Expected Market Returns (July 14, 2010). Available at SSRN: http://ssrn.com/abstract=1511970 or http://dx.doi.org/10.2139/ssrn.1511970

Contact Information

Yigit Atilgan
Sabanci University ( email )
Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

K. Ozgur Demirtas (Contact Author)
CUNY Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way, Box 10-225
Department of Finance
New York, NY 10010
United States
646-312-3484 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://www.ozgur-demirtas.com
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