Internet Appendix to the Only Constant is Change: Non-Constant Volatility and Implied Volatility Spreads

16 Pages Posted: 14 Mar 2023

See all articles by T. Colin Campbell

T. Colin Campbell

University of Cincinnati - Department of Finance - Real Estate

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Alex Petkevich

University of Denver

Date Written: March 10, 2023

Abstract

We examine the predictability of stock returns using implied volatility spreads (VS) from individual (non-index) options. Volatility spreads can occur under simple no-arbitrage conditions for American options when volatility is time-varying, suggesting that the VS-return predictability could be an artifact of firms’ sensitivities to aggregate volatility. Examining this empirically, we find that the predictability changes systematically with aggregate volatility and is positively related to the firms’ sensitivities to volatility risk. The alpha generated by VS hedge portfolios can be explained by aggregate volatility risk factors. Our results cannot be explained by firm-specific informed trading, transaction costs, or liquidity.

Keywords: Implied Volatility Spreads, Non-constant Volatility

JEL Classification: G11, G12

Suggested Citation

Campbell, Timothy Colin and Gallmeyer, Michael F. and Petkevich, Alex, Internet Appendix to the Only Constant is Change: Non-Constant Volatility and Implied Volatility Spreads (March 10, 2023). Available at SSRN: https://ssrn.com/abstract=4384496 or http://dx.doi.org/10.2139/ssrn.4384496

Timothy Colin Campbell

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

Alex Petkevich (Contact Author)

University of Denver ( email )

2101 S. University Blvd.
Denver, CO 80208-8921
United States

HOME PAGE: http://https://sites.google.com/view/alexpetkevich/home

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