Commonalities in Firm-level Implied Volatilities

48 Pages Posted: 9 Sep 2023 Last revised: 16 Nov 2024

See all articles by Mykola Babiak

Mykola Babiak

Lancaster University Management School

Jozef Baruník

Charles University in Prague - Department of Economics; Institute of Information Theory and Automation, Prague

Mattia Bevilacqua

University of Liverpool - Management School (ULMS); Systemic Risk Centre - London School of Economics

Michael Ellington

University of Liverpool

Date Written: November 16, 2024

Abstract

We decompose firm-level implied volatilities into upside and downside measures that
link with the expectation of upward and downward price movements. We show that
firms’ implied volatilities and their components obey a strong factor structure. Shocks
to common downside implied volatility are priced, with stocks in the lowest downside
implied volatility beta quintile earning average annualized risk-adjusted returns 8.52%
higher than those in the highest quintile. We provide empirical evidence linking commonalities
within firm-level implied volatilities to household income risks. This implies
common implied volatilities proxy for partially uninsurable idiosyncratic consumption
risk of households.

Keywords: firm-level, Implied Volatility, option prices, cross section of stock returns

JEL Classification: G11, G12, E44, G14

Suggested Citation

Babiak, Mykola and Barunik, Jozef and Bevilacqua, Mattia and Ellington, Michael, Commonalities in Firm-level Implied Volatilities (November 16, 2024). Available at SSRN: https://ssrn.com/abstract=4565218 or http://dx.doi.org/10.2139/ssrn.4565218

Mykola Babiak

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

HOME PAGE: http://https://sites.google.com/site/mykolababiak/home

Jozef Barunik (Contact Author)

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague 1, 110 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/barunik

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

HOME PAGE: http://staff.utia.cas.cz/barunik/home.htm

Mattia Bevilacqua

University of Liverpool - Management School (ULMS) ( email )

Chatham St
Liverpool, L69 7ZH
United Kingdom

Systemic Risk Centre - London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Michael Ellington

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

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