Implied and Realized Volatility in the Cross-Section of Equity Options
University of St. Gallen - SoF: School of Finance
University of Aarhus - School of Business and Social Sciences
University of St. Gallen - Swiss Institute of Banking and Finance
International Journal of Theoretical and Applied Finance, Vol. 12, No. 6, pp. 745-765, 2009
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.
Keywords: Implied volatility, realized volatility
Date posted: December 1, 2009
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