Why Do Price and Volatility Information from the Options Market Predict Stock Returns?

67 Pages Posted: 13 Oct 2016 Last revised: 29 Apr 2020

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: April 20, 2018

Abstract

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

Muravyev, Dmitriy and Pearson, Neil D. and Pollet, Joshua Matthew, Why Do Price and Volatility Information from the Options Market Predict Stock Returns? (April 20, 2018). Available at SSRN: https://ssrn.com/abstract=2851560 or http://dx.doi.org/10.2139/ssrn.2851560

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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