Abstract

http://ssrn.com/abstract=1533089
 
 

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The Joint Cross Section of Stocks and Options


Andrew Ang


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici


Fordham University

March 1, 2010

AFA 2011 Denver Meetings Paper
Fordham University Schools of Business Research Paper No. 2010-003

Abstract:     
Option volatilities have significant predictive power for the cross section of stock returns and vice versa. Stocks with large increases in call implied volatilities tend to rise over the following month whereas increases in put implied volatilities forecast future decreases in next-month stock returns. The spread in average returns and alphas between the first and fifth quintile portfolios formed by ranking on lagged changes in implied call volatilities is approximately 1% per month. Going in the other direction, stocks with high returns over the past month tend to have call option contracts that exhibit increases in implied volatility over the next month, but realized volatility tends to decrease. The results are consistent with the slow diffusion of information across option and underlying equity markets and are suggestive of informed trading occurring in both asset markets.

Number of Pages in PDF File: 58

Keywords: implied volatility, risk premiums, return predictability, momentum

JEL Classification: G10, G11, C13

working papers series


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Date posted: January 8, 2010 ; Last revised: February 27, 2012

Suggested Citation

Ang, Andrew and Bali, Turan G. and Cakici, Nusret, The Joint Cross Section of Stocks and Options (March 1, 2010). AFA 2011 Denver Meetings Paper; Fordham University Schools of Business Research Paper No. 2010-003. Available at SSRN: http://ssrn.com/abstract=1533089 or http://dx.doi.org/10.2139/ssrn.1533089

Contact Information

Andrew Ang
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Turan G. Bali (Contact Author)
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

Nusret Cakici
Fordham University ( email )
Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)
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References:  68
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