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Option-Implied Volatility Measures and Stock Return Predictability

Author

Listed:
  • Xi Fu

    (University of Liverpool)

  • Eser Arisoy

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Mark Shackleton

    (Lancaster University)

  • Mehmet Umutlu

    (Izmir Ekonomi Universitesi - Izmir Ekonomi Universitesi)

Abstract

Using firm-level option and stock data, we examine the predictive ability of option-implied volatility measures proposed by previous studies and recommend the best measure using up-to-date data. Portfolio-level analysis implies significant non-zero risk-adjusted returns on arbitrage portfolios formed on the call -- put implied volatility spread, implied volatility skew, and realized -- implied volatility spread. Firm-level cross-sectional regressions show that the implied volatility skew has the most significant predictive power over various investment horizons. The predictive power persists before and after the 2008 Global Financial Crisis

Suggested Citation

  • Xi Fu & Eser Arisoy & Mark Shackleton & Mehmet Umutlu, 2016. "Option-Implied Volatility Measures and Stock Return Predictability," Post-Print hal-01484672, HAL.
    • Handle: RePEc:hal:journl:hal-01484672
    DOI: 10.3905/jod.2016.24.1.058
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    Citations

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    Cited by:

    1. Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2015. "Towards a skewness index for the Italian stock market," Department of Economics 0064, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    2. Kristjanpoller, Werner & Nekhili, Ramzi & Bouri, Elie, 2024. "Blockchain ETFs and the cryptocurrency and Nasdaq markets: Multifractal and asymmetric cross-correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 637(C).
    3. Matteo Michielon & Asma Khedher & Peter Spreij, 2021. "Liquidity-free implied volatilities: an approach using conic finance," Papers 2110.11718, arXiv.org.
    4. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    5. Nikolaos Voukelatos & Thanos Verousis, 2019. "Option‐implied information and stock herding," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(4), pages 1429-1442, October.
    6. Umutlu, Mehmet & Bengitöz, Pelin, 2020. "The cross-section of industry equity returns and global tactical asset allocation across regions and industries," International Review of Financial Analysis, Elsevier, vol. 72(C).

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