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 journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)379-390
Number of pages12
JournalJournal of Forecasting
Volume34
Issue number5
DOIs
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

Fingerprint

Dive into the research topics of 'Cross-section stock return and implied covariance between jump and diffusive volatility'. Together they form a unique fingerprint.

Cite this