Correlated implied volatility with jump and cross section of stock returns

Samuel Ze-To*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    2 Citations (Scopus)


    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.

    Original languageEnglish
    Pages (from-to)1187-1214
    Number of pages28
    JournalAccounting and Finance
    Issue number4
    Early online date10 Mar 2015
    Publication statusPublished - Dec 2016

    Scopus Subject Areas

    • Accounting
    • Finance
    • Economics, Econometrics and Finance (miscellaneous)

    User-Defined Keywords

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


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