Do Implied Volatilities Predict Stock Returns?
28 Pages Posted: 4 Sep 2010
Date Written: September 2, 2010
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
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