Equity Volatility Term Structures and the Cross-Section of Option Returns

Vasquez, Aurelio

doi:10.2139/ssrn.1944298

Abstract

References (41)

Citations (1)

Download This Paper | Share | Email |Add to Briefcase | Purchase Bound Hard Copy

Equity Volatility Term Structures and the Cross-Section of Option Returns

Aurelio Vasquez

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

November 25, 2012

Abstract:
The slope of the implied volatility term structure is positively related with future option returns. We rank firms based on the slope of the volatility term structure and analyze the returns for five different option trading strategies. Option portfolios with high slopes of the volatility term structure outperform option portfolios with low slopes by an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by well-known market, size, book-to-market, or momentum factors. Additional higher-order option-related factors, volatility risk remiums, jump risk, and existing option anomalies cannot explain the large option returns.

Number of Pages in PDF File: 39

Keywords: Equity Options, Volatility Term Structure, Implied Volatility, Predictability, Cross-Section

JEL Classification: C21, G13, G14

working papers series

Download This Paper

Date posted: October 14, 2011 ; Last revised: February 22, 2013

Suggested Citation

Vasquez, Aurelio, Equity Volatility Term Structures and the Cross-Section of Option Returns (November 25, 2012). Available at SSRN: http://ssrn.com/abstract=1944298 or http://dx.doi.org/10.2139/ssrn.1944298

Contact Information

Aurelio Vasquez (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration ( email )

Rio Hondo No. 1
Col. Tizapan-San Angel, 01000
Mexico