Correlated implied volatility with jump and cross section of stock returns

Ze-To, S. 2015. Correlated implied volatility with jump and cross section of stock returns. Accounting & Finance. 60 (3), pp. 2007-2037. https://doi.org/10.1111/acfi.12429

TitleCorrelated implied volatility with jump and cross section of stock returns
TypeJournal article
AuthorsZe-To, S.
Abstract

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 -sigmaC), jump risk (RV  cC) and covariance (RV  ICov) can forecast future returns. These RV - sigmaC and RV - cC anomalies are robustly persistent even after controlling for market, size, book-to-market value, momentum and liquidity factors.

KeywordsCross-sectional stock return
Implied volatility
Option-implied covariance JEL
JournalAccounting & Finance
Journal citation60 (3), pp. 2007-2037
ISSN0810-5391
Year2015
PublisherWiley
Digital Object Identifier (DOI)https://doi.org/10.1111/acfi.12429
Publication dates
Published02 Feb 2015

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