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Do Implied Volatilities Predict Stock Returns?

28 Pages Posted: 4 Sep 2010  

Manuel Ammann

University of St. Gallen - School of Finance

Stephan Süss

Independent

Michael Verhofen

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

Date Written: September 2, 2010

Abstract

Using a complete sample of US equity options, we find a positive, highly significant relation between stock returns and lagged implied volatilities. The results are robust after controlling for a number of factors such as firm size, market value, analyst recommendations and different levels of implied volatility. Lagged historical volatility is - in contrast to the corresponding implied volatility - not relevant for stock returns. We find considerable time variation in the relation between lagged implied volatility and stock returns.

Keywords: Implied Volatility, Expected Returns

Suggested Citation

Ammann, Manuel and Süss, Stephan and Verhofen, Michael, Do Implied Volatilities Predict Stock Returns? (September 2, 2010). Available at SSRN: https://ssrn.com/abstract=1670909 or http://dx.doi.org/10.2139/ssrn.1670909

Manuel Ammann

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

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Stephan Süss

Independent

No Address Available

Michael Verhofen (Contact Author)

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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