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The Joint Cross Section of Stocks and Options

96 Pages Posted: 1 Nov 2013  

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: October 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.

Suggested Citation

An, Byeong-Je and Ang, Andrew and Bali, Turan G. and Cakici, Nusret, The Joint Cross Section of Stocks and Options (October 2013). NBER Working Paper No. w19590. Available at SSRN: https://ssrn.com/abstract=2348461

Byeong-Je An (Contact Author)

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

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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