Correlated implied volatility with jump and cross section of stock returns

Samuel Ze-To

doi:10.1111/acfi.12111

Correlated implied volatility with jump and cross section of stock returns

Samuel Ze-To^*

^*Corresponding author for this work

Research output: Contribution to journal › Journal article › peer-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 − IV_C) in the cross section of stock returns. The difference of realized volatility with the implied diffusive volatility (RV − σ_C), jump risk (RV − γ_C) and covariance (RV − ICov) can forecast future returns. These RV − σ_C and RV − γ_C anomalies are robustly persistent even after controlling for market, size, book-to-market value, momentum and liquidity factors.

Original language	English
Pages (from-to)	1187-1214
Number of pages	28
Journal	Accounting and Finance
Volume	56
Issue number	4
Early online date	10 Mar 2015
DOIs	https://doi.org/10.1111/acfi.12111
Publication status	Published - 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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10.1111/acfi.12111

Cite this

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title = "Correlated implied volatility with jump and cross section of stock returns",

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.",

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AB - 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.

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JF - Accounting and Finance

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ER -

Correlated implied volatility with jump and cross section of stock returns

Abstract

Scopus Subject Areas

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