Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility : WestminsterResearch

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Title	Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility
Type	Journal article
Authors	Ze-To, S.
Abstract	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	option-implied covariance
	implied volatility
	cross-sectional stock return
Journal	Journal of Forecasting
Journal citation	34 (5), pp. 379-390
ISSN	1099-131X
Year	2015
Publisher	Wiley
Digital Object Identifier (DOI)	https://doi.org/10.1002/for.2348
Published	24 May 2015

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Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility

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