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Do implied volatilities predict stock returns?

Author

Listed:
  • Manuel Ammann
  • Michael Verhofen

    (Allianz Global Investors, Mainzer Landstrasse 11–13)

  • Stephan Süss

Abstract

Using a complete sample of US equity options, we find a positive, highly significant relationship between stock returns and lagged implied volatilities. The results are robust after controlling for a number of factors such as firm size, market valuation, analyst recommendations and different levels of implied volatility. Lagged historical volatility is – in contrast to the corresponding implied volatility – not relevant for stock returns. We find considerable time variation in the relationship between lagged implied volatility and stock returns.

Suggested Citation

  • Manuel Ammann & Michael Verhofen & Stephan Süss, 2009. "Do implied volatilities predict stock returns?," Journal of Asset Management, Palgrave Macmillan, vol. 10(4), pages 222-234, October.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:4:d:10.1057_jam.2009.14
    DOI: 10.1057/jam.2009.14
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    References listed on IDEAS

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    Cited by:

    1. Max Schreder, 2018. "Volatility forecasting in practice: exploratory evidence from European hedge funds," Journal of Asset Management, Palgrave Macmillan, vol. 19(4), pages 245-258, July.
    2. Tsafack, Georges & Becker, Ying & Han, Ki, 2023. "Earnings announcement premium and return volatility: Is it consistent with risk-return trade-off?," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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