Recovering Factor Volatility

45 Pages Posted: 17 May 2017 Last revised: 30 Oct 2018

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Fang Liu

Cornell University

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: October 28, 2018

Abstract

We show that any factor structure for stock returns naturally induces a factor structure for return volatility. We use this structure to propose a methodology for estimating forward-looking variances and covariances of both factors and individual assets from option prices at a high frequency. We implement the model empirically and show that our forward-looking volatility estimates provide useful implications for optimal portfolio choice and the prediction of jumps for both factors and individual stocks.

Suggested Citation

Kadan, Ohad and Liu, Fang and Tang, Xiaoxiao, Recovering Factor Volatility (October 28, 2018). 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=2969089 or http://dx.doi.org/10.2139/ssrn.2969089

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fang Liu (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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