Cross-section stock return and implied covariance between jump and diffusive volatility

Samuel Y M Ze-To*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review


    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.

    Original languageEnglish
    Pages (from-to)379-390
    Number of pages12
    JournalJournal of Forecasting
    Issue number5
    Early online date24 May 2015
    Publication statusPublished - Aug 2015

    Scopus Subject Areas

    • Modelling and Simulation
    • Computer Science Applications
    • Strategy and Management
    • Statistics, Probability and Uncertainty
    • Management Science and Operations Research

    User-Defined Keywords

    • cross-sectional stock return
    • implied volatility
    • option-implied covariance


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