In Search of a Factor Model for Optionable Stocks

74 Pages Posted: 1 Dec 2019

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: November 15, 2019

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 average returns of portfolios of optionable stocks formed by sorting on other option-based predictors, as well as a large number of other well-known predictors, of the cross section of future stock returns. The newly proposed model provides a benchmark for assessing whether portfolios of optionable stocks generate average returns that are not a manifestation of 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 (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=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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