Correlated implied volatility with jump and cross section of stock returns

Samuel Y M ZE-TO*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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 − 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
Volume56
Issue number4
DOIs
Publication statusPublished - 1 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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