Document Type

Journal Article

Department/Unit

Department of Finance and Decision Sciences

Title

Cross-section stock return and implied covariance between jump and diffusive volatility

Language

English

Abstract

© 2015 John Wiley & Sons, Ltd. I examine the information content of option-implied covariance between jumps and diffusive risk in the cross-sectional variation in future returns. This paper documents that the difference between realized volatility and implied covariance (RV-ICov) can predict future returns. The results show a significant and negative association of expected return and realized volatility-implied covariance spread in both the portfolio level analysis and cross-sectional regression study. A trading strategy of buying a portfolio with the lowest RV-ICov quintile portfolio and selling with the highest one generates positive and significant returns. This RV-Cov anomaly is robust to controlling for size, book-to-market value, liquidity and systematic risk proportion.

Keywords

cross-sectional stock return, implied volatility, option-implied covariance

Publication Date

2015

Source Publication Title

Journal of Forecasting

Volume

34

Issue

5

Start Page

379

End Page

390

Publisher

Wiley

DOI

10.1002/for.2348

Link to Publisher's Edition

http://dx.doi.org/10.1002/for.2348

ISSN (print)

02776693

ISSN (electronic)

1099131X

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