Option-Implied Volatility Measures and Stock Return Predictability

Posted: 20 May 2019 Last revised: 9 Aug 2019

See all articles by Xi Fu

Xi Fu

University of Liverpool

Yakup Eser Arısoy

NEOMA Business School

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Mehmet Umutlu

Edinburgh Napier University, The Business School, Accounting and Finance Subject Group

Date Written: April 14, 2016

Abstract

Using firm-level option and stock data, we examine the predictive ability of option-implied volatility measures proposed by previous studies and recommend the best measure using up-to-date data. Portfolio level analysis implies significant non-zero risk-adjusted returns on arbitrage portfolios formed on the call-put implied volatility spread, implied volatility skew, and realized-implied volatility spread. Firm-level cross-sectional regressions show that, the implied volatility skew has the most significant predictive power over various investment horizons. The predictive power persists before and after the 2008 Global Financial Crisis.

Keywords: option-implied volatility, volatility skew, return predictability

JEL Classification: G11, G12

Suggested Citation

Fu, Xi and Arısoy, Yakup Eser and Shackleton, Mark B. and Umutlu, Mehmet, Option-Implied Volatility Measures and Stock Return Predictability (April 14, 2016). Journal of Derivatives, Vol. 24, No.1, 58-78, 2016, https://doi.org/10.3905/jod.2016.24.1.058, Available at SSRN: https://ssrn.com/abstract=2378969 or http://dx.doi.org/10.2139/ssrn.2378969

Xi Fu (Contact Author)

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

Yakup Eser Arısoy

NEOMA Business School ( email )

59 rue Pierre Taittinger
Reims, 51100
France

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Mehmet Umutlu

Edinburgh Napier University, The Business School, Accounting and Finance Subject Group ( email )

Craiglockhart Campus
Edinburgh, Scotland EH11 4BN
United Kingdom

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