Why Do Price and Volatility Information from the Options Market Predict Stock Returns?
67 Pages Posted: 13 Oct 2016 Last revised: 29 Apr 2020
Date Written: April 20, 2018
The option implied volatility spread and skew predict stock returns. These variables also reflect the expected cost of borrowing stock to sell short. The stock borrowing fee implied from options prices predicts changes in quoted borrowing fees and stock returns; however, the volatility spread and skew do not once this implied fee is considered. Results are similar for a low options volume subsample in which options informed trading does not plausibly cause options to impound information not yet in stock prices. These findings indicate that the volatility spread and skew predict returns because they proxy for expected stock borrowing costs.
Keywords: equity options, put-call parity, implied volatility spread, implied volatility skew, stock borrowing fee, stock lending fee
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation