Department of Finance and Decision Sciences
Correlated implied volatility with jump and cross section of stock returns
© 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.
Cross-sectional stock return, Implied volatility, Option-implied covariance
Source Publication Title
Accounting and Finance
Link to Publisher's Edition
Ze-To, S., & Cahan, S. (2015). Correlated implied volatility with jump and cross section of stock returns. Accounting and Finance. https://doi.org/10.1111/acfi.12111