The Distribution of Stock Returns Implied in Their Options at the Turn-of-The-Year: A Test of Seasonal Volatility
J. OF BUSINESS, Vol. 70 No. 2, April 1997
Posted: 13 Feb 1997
We find that for a sample of call options on stocks with low returns in the prior year, the implied volatilities increase as the year-end approaches. On the other hand, we do not detect an increase in the volatilities implied from the put options on the same stocks over the same dates. This is inconsistent with a hypothesis that the turn-of-the-year seasonal in stock returns is due to a seasonal increase in systematic risk. Instead, the results are consistent with price pressure from portfolio rebalancing at the turn-of- the-year. The implications are that the option market anticipates the return seasonal, but it survives in the stock market due to transaction costs.
JEL Classification: G13, G12
Suggested Citation: Suggested Citation