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The Joint Cross Section of Stocks and Options

142 Pages Posted: 22 Feb 2012 Last revised: 24 Mar 2014

Byeong-Je An

Nanyang Technological University (NTU) - Division of Banking & Finance

Andrew Ang

BlackRock, Inc

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici

Fordham University

Multiple version iconThere are 4 versions of this paper

Date Written: June 28, 2013

Abstract

Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decile portfolios by past call implied volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option-implied volatilities, with stocks with high past returns tending to have call and put option contracts which exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.

Keywords: implied volatility, risk premiums, predictability, short-term momentum

JEL Classification: G10, G11, C13

Suggested Citation

An, Byeong-Je and Ang, Andrew and Bali, Turan G. and Cakici, Nusret, The Joint Cross Section of Stocks and Options (June 28, 2013). Georgetown McDonough School of Business Research Paper No. 2012-10. Available at SSRN: https://ssrn.com/abstract=2008902 or http://dx.doi.org/10.2139/ssrn.2008902

Byeong-Je An

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1a-05 Nanyang Avenue
Singapore, 639798
Singapore

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

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