Commonalities in Firm-level Implied Volatilities
48 Pages Posted: 9 Sep 2023 Last revised: 16 Nov 2024
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: 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
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