Implied and Realized Volatility in the Cross-Section of Equity Options

International Journal of Theoretical and Applied Finance, Vol. 12, No. 6, pp. 745-765, 2009

30 Pages Posted: 8 Jan 2009  

Manuel Ammann

University of St. Gallen - School of Finance

David Skovmand

University of Aarhus - School of Business and Social Sciences

Michael Verhofen

University of St. Gallen - Swiss Institute of Banking and Finance; Allianz Global Investors

Date Written: November 1, 2008

Abstract

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

JEL Classification: G10

Suggested Citation

Ammann, Manuel and Skovmand, David and Verhofen, Michael, Implied and Realized Volatility in the Cross-Section of Equity Options (November 1, 2008). International Journal of Theoretical and Applied Finance, Vol. 12, No. 6, pp. 745-765, 2009. Available at SSRN: https://ssrn.com/abstract=1324605 or http://dx.doi.org/10.2139/ssrn.1324605

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

David Skovmand

University of Aarhus - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Michael Verhofen

Allianz Global Investors ( email )

Frankfurt
Germany

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

HOME PAGE: http://www.verhofen.com

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