Equity Volatility Term Structures and the Cross-Section of Option Returns
53 Pages Posted: 14 Oct 2011 Last revised: 30 Jan 2016
Date Written: November 23, 2015
The slope of the implied volatility term structure is positively related to future option returns. We rank firms based on the slope of the volatility term structure and analyze the returns for straddle portfolios. Straddle portfolios with high slopes of the volatility term structure outperform straddle portfolios with low slopes by an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by traditional factors, higher-order option factors, or jump risk.
Keywords: Equity Options, Volatility Term Structure, Implied Volatility, Predictability, Cross-Section
JEL Classification: C21, G13, G14
Suggested Citation: Suggested Citation