In Search of a Factor Model for Optionable Stocks

79 Pages Posted: 1 Dec 2019 Last revised: 16 Apr 2020

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: April 15, 2020

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, along with the market factor. 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. Our model provides a benchmark for assessing whether portfolios of optionable stocks generate returns that are not explained by previously-documented phenomena.

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 (April 15, 2020). 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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