Equity Volatility Term Structures and the Cross-Section of Option Returns
Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration
November 25, 2012
The slope of the implied volatility term structure is positively related with future option returns. We rank fi rms 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 signi ficant 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, G14working papers series
Date posted: October 14, 2011 ; Last revised: February 22, 2013
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