Equity Volatility Term Structures and the Cross-Section of Option Returns

53 Pages Posted: 14 Oct 2011 Last revised: 30 Jan 2016

See all articles by Aurelio Vasquez

Aurelio Vasquez

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

Date Written: November 23, 2015

Abstract

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

Vasquez, Aurelio, Equity Volatility Term Structures and the Cross-Section of Option Returns (November 23, 2015). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1944298 or http://dx.doi.org/10.2139/ssrn.1944298

Aurelio Vasquez (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration ( email )

Rio Hondo No. 1
Col. Tizapan-San Angel, 01000
Mexico

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