In Search of a Factor Model for Optionable Stocks

150 Pages Posted: 1 Dec 2019 Last revised: 6 Feb 2021

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Scott Murray

Georgia State University

Date Written: February 1, 2021

Abstract

We propose the first factor model that explains cross-sectional variation in optionable stock returns. Our model includes new factors based on option-implied volatility minus realized volatility, the call minus put implied volatility spread, and the difference between changes in call and put implied volatilities. The model outperforms previously-proposed factor models at explaining the performance of portfolios of optionable stocks formed by sorting on other option-based predictors, as well as other well-known stock return predictors. The predictive power of the option-based factors is driven by informed trading and their exposures to aggregate volatility and financial uncertainty.

Keywords: Optionable stocks, factor model, cross section of stock returns

JEL Classification: G11, G12, G13

Suggested Citation

Bali, Turan G. and Murray, Scott, In Search of a Factor Model for Optionable Stocks (February 1, 2021). Georgetown McDonough School of Business Research Paper No. 3487947, Available at SSRN: https://ssrn.com/abstract=3487947 or http://dx.doi.org/10.2139/ssrn.3487947

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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