Implied Idiosyncratic Volatility and Stock Return Predictability

Journal of Mathematical Finance, 2014, 4, 338-352

16 Pages Posted: 12 Dec 2016

See all articles by Cesario Mateus

Cesario Mateus

Aalborg University Business School

Worawuth Kongsilp

University of Greenwich - Business School

Date Written: December 9, 2016

Abstract

This paper investigates the role of volatility risk on stock return predictability. Using 596 stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE) for the period from January 2001 to December 2010, it examines the relation between different idiosyncratic volatility measures and expected stock returns for a period that involves both the dotcom bubble and the recent financial crisis. First it is showed that implied idiosyncratic volatility is the best stock return predictor among the different volatility measures used. Second, cross-section firm-specific characteristics are important on stock returns forecast. Third, we provide evidence that higher short selling constraints impact negatively stock returns having liquidity the opposite effect.

Keywords: Options, Risk Premium, Stock, Volatility

Suggested Citation

Mateus, Cesario and Kongsilp, Worawuth, Implied Idiosyncratic Volatility and Stock Return Predictability (December 9, 2016). Journal of Mathematical Finance, 2014, 4, 338-352, Available at SSRN: https://ssrn.com/abstract=2883303

Cesario Mateus (Contact Author)

Aalborg University Business School ( email )

Aalborg
Denmark

Worawuth Kongsilp

University of Greenwich - Business School ( email )

Old Royal Naval College, Park Row, Greenwich,
London, SE10 9LS
United Kingdom

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