Options-Implied Variance and Future Stock Returns

77 Pages Posted: 20 Aug 2011 Last revised: 17 May 2014

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2014


Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between options-implied variance and future stock returns. Consistent with Miller’s (1977) divergence of opinion hypothesis, the negative relation gets stronger (1) for stocks with more stringent short-sale constraints or (2) when shorting stocks becomes more difficult. Moreover, the negative correlation of realized idiosyncratic variance or analyst forecast dispersion with future stock returns mainly reflects their close correlation with our conditional idiosyncratic variance measure.

Keywords: stock return predictability, implied variance, realized variance, CAPM, and ICAPM

JEL Classification: G1

Suggested Citation

Guo, Hui and Qiu, Buhui, Options-Implied Variance and Future Stock Returns (February 1, 2014). Journal of Banking and Finance, Volume 44, July 2014, Pages 93-113., Available at SSRN: https://ssrn.com/abstract=1912738 or http://dx.doi.org/10.2139/ssrn.1912738

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
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Cincinnati, OH 45221
United States
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513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Buhui Qiu

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane

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