The Information Content of Option Prices Regarding Future Stock Return Serial Correlation

61 Pages Posted: 27 Jan 2014

Date Written: January 1, 2014

Abstract

I investigate the relation between option prices and daily stock return serial correlation. I demonstrate that the variance ratio, calculated as the ratio of realized to implied stock return variance, has both a contemporaneous and predictive relation with stock return serial correlation. The ability of the variance ratio to predict future stock return serial correlation gives rise to a daily trading strategy that implements reversal trading on stocks predicted to exhibit large negative serial correlation and momentum trading on stocks with high predicted serial correlation. The trading strategy generates risk-adjusted returns in excess of 6.5% per year.

Keywords: Implied Volatility, Serial Correlation

JEL Classification: G12, G14, G17

Suggested Citation

Murray, Scott, The Information Content of Option Prices Regarding Future Stock Return Serial Correlation (January 1, 2014). Available at SSRN: https://ssrn.com/abstract=2384985 or http://dx.doi.org/10.2139/ssrn.2384985

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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