The Joint Cross Section of Stocks and Options
Columbia Business School - Finance and Economics
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
June 28, 2013
Georgetown McDonough School of Business Research Paper No. 2012-10
Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decile portfolios by past call implied volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option-implied volatilities, with stocks with high past returns tending to have call and put option contracts which exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.
Number of Pages in PDF File: 135
Keywords: implied volatility, risk premiums, predictability, short-term momentum
JEL Classification: G10, G11, C13working papers series
Date posted: February 22, 2012 ; Last revised: October 8, 2013
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