Document Type

Journal Article

Department/Unit

Department of Finance and Decision Sciences

Title

Correlated implied volatility with jump and cross section of stock returns

Language

English

Abstract

© 2015 AFAANZ I derive the option-implied volatility allowing for nonzero correlation between price jump and diffusive risk to examine the information content of implied diffusive, jump risks and their implied covariance in the cross-sectional variation of future returns. This study documents a strong predictive power of realized volatility and correlated implied volatility spread (RV − IVC) in the cross section of stock returns. The difference of realized volatility with the implied diffusive volatility (RV − σC), jump risk (RV − γC) and covariance (RV − ICov) can forecast future returns. These RV − σC and RV − γC anomalies are robustly persistent even after controlling for market, size, book-to-market value, momentum and liquidity factors.

Keywords

Cross-sectional stock return, Implied volatility, Option-implied covariance

Publication Date

2015

Source Publication Title

Accounting and Finance

Publisher

Wiley

DOI

10.1111/acfi.12111

Link to Publisher's Edition

http://dx.doi.org/10.1111/acfi.12111

ISSN (print)

08105391

ISSN (electronic)

1467629X

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